Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Scott Nolan, Patrick O'Shaughnessy
[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. [00:00:00] S0: And then the final step is building a great enduring company. By which I mean not just a flow of cash flow, but a collection of people and a set of impacts on the country. How do you think about the most important things you can do starting now to build a great company, and what does that mean to you? You've invested in many great companies. What is a great company on top of a good product and a stream of cash flow?
· Scott Nolan
[00:00:00] S1: It comes back to the team. I think Naval has said this a bunch of times. The team you build is the company you build. And so to us, it's team DNA. We want people – we thought about where do we put the company? This was a big question at the very beginning. And you look at who you actually need on the team. And of course you need nuclear engineers, but you also need great mechanical engineers, electrical, software, chemical – every type of engineering. And so you ask yourself, well, where do we want to put the company? And it turns out the percent of the team that's nuclear engineers is single digits. We're not doing a reactor. There's actually no nuclear reactions in our process. We need to make sure that there's no nuclear reactions, but to do that, you don't need a huge number of nuclear engineers. And so there was this question of, do you go to where the nuclear engineers are, or do you go to where all those other types of engineers are? And on dimension one, the nuclear engineers, you don't need that many of. You need great ones though. Where are we going to find them? And you look at where they are in the country and they're just scattered everywhere. There's no one place to go. And so we had to go with the other option. You go to where all the other engineers are, specifically hardware, aerospace, and that's Southern California. The team DNA that we wanted to set up was this is an engineering driven company. We're not doing a science project. No new physics. No going down a multi-year R&D path that's uncertain. We need to get this operational as fast as possible. This is an engineering problem. Everything we have to do has to be thought of as engineering. We're engineering cost out of the system. We're engineering performance up. We're engineering cost of capital down. We're engineering schedule to be as tight as possible. We're even engineering our own buildings. This is taken from the Tesla playbook. Don't hire a GC and outsource everything. You lose total control. The schedule could be – it's not in your hands anymore. You need to build your own in-house engineer, procure, construct EPC firm as a team to go run your construction projects because it's one of the hardest things about this. Not just engineering, not just manufacturing, but actually the construction of millions of square feet – on schedule, on budget.