Invest Like the Best with Patrick O'Shaughnessy
· Scott Nolan
[00:00:00] S1: All enrichment is for the most part the same. If you think of it again as like a refining process or a distillation process, you're just refining it further. Ultimately, the product that we make is enrichment services. You can run material through from natural uranium as it comes out of the ground, and you can run it through an enrichment process to get to any arbitrary level of enrichment. The commercially relevant ones are LEU, three to five percent for existing reactors. Or HALEU, 20 percent for advanced reactors. And so when we set out to do this, we said, hey, HALU is what the market needs most right now. And we set out pre-Russia ban. So there was no LEU cliff. We said we're going to develop enrichment capability to serve that market. And the fundamental unit of enrichment capability is, it's just the ability to do this refining. It's measured as something called separative work units in the enrichment field. We will provide that service and we will sell that service to utilities and advanced reactors to get them the fuel that they need. So ultimately, the product that we developed is enrichment, and you can apply it to either of those levels. To your question on how is that different from weapons grade – when you see countries going to weapons grade, they're often trying to go north of 20 percent, which is the internationally agreed limit to where you go to weapons grade. For non-proliferation reasons, there's strong international consensus that we should all just stay below 20. Really the risk is not worth the reward to let people go higher. You see countries going to 60 percent, saying that it's for their nuclear energy industry and it's pretty suspect. I think clearly, they're just trying to get as close as they can to weapons grade, which is well over 90 percent. And they're trying to develop weapons. And so ultimately, it's not different technology, but it's applied in a different way and in a completely non-international consensus setup.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: Is the percentage – is the right way to think about that like purity or something? [00:00:00] S1: Yeah, there's U-238, there's U-235. As it comes out of the ground, there's other isotopes also. But the main one's U-238 and you basically want to filter that out to get U-235. U-235 is the isotope that wants to react. That's the fissile isotope. [00:00:00] S0: What do we know about the stock of ore in the world? The raw element – do we have enough of it? [00:00:00] S1: Yeah, plenty. I think we've got certainly hundreds of years of supply in the ground. U.S. has supply. We have active mining in the U.S. Canada has even more supply, higher-grade ores, enough to supply us for a very long time. Same as Australia. And then Kazakhstan's a huge deposit and the U.S. imports from there as well. So on the ore side, not an issue. That'll progress. That'll get more efficient. There's new techniques there. So mining's going to make progress. I think the cost of mining will come down. Output will go up. But it's not really an issue. [00:00:00] S0: How do you build a great business on top of this product? Is it so easy just because there's so much latent demand for it from this new segment, or are there other considerations?
· Scott Nolan
[00:00:00] S1: I mean, I wouldn't say it's so easy at all. And I think the latent demand has not been obvious for a long time – until the last couple of years. So any large latent demand, I think, is in the last 24 months linked to the thought that there's going to be a lot more data centers doing AI inference or training jobs. But if you go before that, there wasn't a lot of new nuclear being talked about. There was a need for HALEU, but that's a pretty small market. And so I think a lot of people have thought that this is not really something where we need new capacity. If you go back to the 2010s, really no new capacity building anywhere in the 2010s. Certainly not for LEU production, certainly not for HALEU just because it's been emerging so recently. So I think the fact that this is a growing market is – we're still betting on that in many ways. It's not the case that we're currently deploying tons of new reactors in the US, but we think that's coming. So I think the market, we believe in deeply – I don't know that the entire industry believes that the demand is there. They've been through nuclear renaissances before that didn't pan out. And I think their point of view would be, we'll build it when we know that there's a need. At least that's been the attitude of many people that we've talked to. On the ease of doing this, It's a proven thing. People have done this before, but it's still not easy. You see some of these retro technologies that were done in the past, and then we lost a lot of the capability because we didn't do it for so long. And so for enrichment, it's been an industry without a lot of change since really the 90s. Not a lot of progress, not a lot of leveraging of new technology. There's a lot of doing the hard engineering work to get back up to speed to modern. And then even once that's done, you're building facilities that are a million square feet, and large, large multibillion dollar infrastructure projects. In the same way that maybe building the first Tesla Roadster was hard, but the real challenge was how do you scale this up? I think it's extremely underappreciated how much goes into standing up a huge industrial facility. I think that's actually the hard part.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: How do you think about the North Star metric for the business? Like if I equate it to SpaceX, the cost per kilogram to orbit or something like that is a really cool thing to visualize over time. What's your chart going to look like? What's the metric? [00:00:00] S1: Yeah. So they had cost per kilo to orbit. Really to a specific orbit of low earth orbit, and you can actually decompose the orbital piece into a velocity. So it's almost like cost per kilo to some velocity. Our version is cost per kilo of uranium – not of a payload – to some enrichment level. And so it's like cost per kilogram to 3-5%, or to 19%. Which can be described as cost per separative work unit, where separative work unit is the industry measure of enrichment. It's basically kilos times some entropy reduction or separation or organization of the material. And so a separative work unit is typically referred to as kgSWU, kilos times separative work units. Our North Star metric is dollars per kilo SWU. [00:00:00] S0: Does that map onto the value creation cycle of your customer? Is that input cost the key determinant of their success as a business?
· Scott Nolan
[00:00:00] S1: It is. The importance depends on what type of reactor you're running. So if you're doing a gigawatt-scale, classic AP1000 light water reactor that uses 3-5% enriched fuel, low enriched uranium, LEU – then the cost of that fuel as a percent of your overall cost is quite low. It doesn't really matter. What you want is availability. You want reliability. You want diversity of suppliers. You want to know that they're going to be there, and you don't want them overly concentrating and creating supply risk for you. But the cost of the fuel is not a huge input into your cost of electricity, your LCOE. Most of that's going to be capex, for your huge $10 billion project. So for them, it doesn't matter that much. But for advanced reactors, it matters a lot. So some advanced reactors, the cost of the fuel, the HALEU fuel that goes into it – enriched further to 19.75%, which requires more input material to refine it all the way there as you filter through more and more and more material. That fuel can be more than half of their energy production cost. And so to them, it does matter a lot. And the way that fuel has been purchased in the industry so far, which maps directly onto our North Star metric, is five different services. A utility purchases uranium, and then it purchases upgrades to the uranium as it goes through the supply chain. So it's really a tolling business where you buy – they own license to the material, and it's book transfers all the way through. And they are paying different people per unit of service provided to do their work. The service that they provide to us is priced in dollars per SWU. And if you look at the actual cost structure of producing fuel all the way through – for low enriched, maybe enrichment's a little bit less than a third, but it's one of the largest cost segments. For HALEU, it's even more, and we think it's going to be the dominant cost driver of fuel costs.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: Tying it back to the Founders Fund stuff we were talking about at the beginning. You found the highest cost segment of the workflow, sold to the highest percentage of the cost new customer that's emerging, that's small, that you can go own. And that's how you then ultimately build a great business, is by driving all of this force through the narrowest possible choke point. [00:00:00] S1: If you want to put it in investment terms and business strategy terms, that would be it. But I think if you go back to the very beginning, it just turned out that this was the thing that was most necessary. This step of enrichment was why we didn't have the more enriched fuel that advanced reactors needed. And you realize the US had lost the ability, despite being the number one in the world during the 80s by far. It was something we were extremely good at. We completely stopped doing it. This bottleneck was going to be the bottleneck to all of nuclear energy. If you believed in advanced nuclear energy – this is the thing we had to solve. So we did it because no one was doing it. And it was extremely important and urgent. And I think that ended up corresponding to this very good entry point for the market. But I think the two are really linked. I don't think it was coincidence that if you're solving a problem that's urgent, that no one else is doing, on a small but emerging market – it will completely fit that framework.