$LTBR - Lightbridge: Check Out This $1.40 Stock Everybody Else Is Ignoring Dec 19 2013, 10:35 | 13 comments | about: LTBR http://seekingalpha.com/article/1907311-lightbridge-check-out-this-1-40-stock-everybody-else-is-ignoring?source=email_sto_bas_mat_13_26&ifp=0 Disclosure: I am long LTBR. (More...) Scouting for deeply undervalued micro-caps Wall Street is somehow ignoring, we managed to dig up Lightbridge Corporation (LTBR). Listed on the NASDAQ exchange with a tiny $20 million market cap, this company is developing a non-replicable groundbreaking technology that should fundamentally improve the efficiency of nuclear power plants. It is the holy grail: more power, more safety, lower costs. We like the fact Lightbridge is a potential monopolist in the global nuclear power market, boasting extremely valuable patents barring any competition from entering. The stock sports such a skewed asymmetric risk/ reward profile, we instantly became shareholders. Investors of today could be rewarded with a mind-boggling return on their investment. Getting tired of people bragging at parties about their superior returns on Apple (AAPL) or Tesla (TSLA) stock they say they bought years ago? Well, an investment in Lightbridge just might enable you to sweep the floor at a future cocktail party. What is Lightbridge? Lightbridge Corporation is a nuclear fuel technology company founded in 1992. It operates two segments: technology and consulting. The technology segment engages in the design and development of nuclear fuels ranging from all-uranium, all-metal to all-thorium for both existing and new power plants. The consulting segment provides nuclear power consulting and strategic advisory services to commercial and governmental entities. Lightbridge has an unique licensing business model and patent portfolio in place, which could ignite enormous large revenue streams as soon as their technology hits the market after going through 25 years of developing, testing and validating. This article elaborates why and how the company's innovations could be a game-changer in nuclear power. Lightbridge's groundbreaking technology enhances power output The company's vision is to be a global leader in the deployment of safe and commercially viable civil nuclear generation programs. In doing so, Lightbridge's technological segment is developing innovative nuclear fuel technologies designed to significantly enhance the nuclear power industry's economics and increase power output up to 17% for existing power plants. For new build plants it enables up to 30% increase power output without changing the core size. These so called power uprates are an efficient use of capital to increase output as they can be performed in a relatively short time frame. No plant modifications need to be performed to utilize Lightbridge's fuels at current plant power output. This is very important, because it removes the need to install and fund massive new equipment. Let's estimate what these power uprates mean. Depending on the wholesale electricity price and level of power uprate, power plants can benefit from an incremental cash flow ranging from $32 million to $118 million, implying a return on investment of about 10 to 50%, as a result of using Lightbridge's nuclear fuel. These are net figures. And they are highly significant. To be fair, the main source is Lightbridge's own documentation, so it might be on the optimistic note, but independent experts point out that a relatively small and quick investment by adopting Lightbridge's technology could indeed yield a much higher return. We concur and believe Lightbridge's technology promises to be a major game-changer for nuclear power. Independent experts validate the technology Lightbridge's technology was recently validated by peer-reviewed publication in a December 2012 edition of Nuclear Technology, the leading international publication reporting on new information in all areas of the practical application of nuclear science. It concluded: "Power uprates can be an attractive option to nuclear utilities as they can expand the generating capacity of existing units at a much lower overnight costs and shorter time than constructing new reactors." Further, Pace Global, a Siemens (SI) company, conducted an independent study which concluded as follows: "Lightbridge's metallic fuel can deliver significantly improved economics to nuclear utilities from increased power output and extended fuel cycles, resulting in highly attractive returns on invested capital, even with conservative assumptions on reactor conversion and regulatory licensing costs, and fuel technology licensing fees paid to Lightbridge." Renowned independent experts validating the technology is an important signal, so the company's word does not have to be taken for granted, especially given the high stakes and political sensitivity surrounding nuclear power. Lightbridge addresses safety issue Speaking about high stakes, you probably know what happened at the Fukushima power plant. There is more than just improving output: safety. We like the fact Lightbridge's technology is able to increase safety at power plants. The following inherent design features are expected to enhance safety characteristics under normal operation and certain off-normal events. A key part of the testing planned by Lightbridge includes experiments to confirm and demonstrate these safety benefits. Lower fuel operating temperature: Reduces the amount of heat that must be dissipated into the coolant at reactor shutdown and shortens the time required to do so. Increased heat transfer between fuel and coolant that improves fuel coolability: Improves the speed at which heat from the fuel can be dissipated into the coolant, increased fuel rod surface area and facilitates heat dissipation into the coolant and reduces local hot spots in fuel rods Improved cladding integrity due to metallurgical bonding of fuel to the cladding Helps retain radioactive material inside the fuel rod in case of cladding breach. Cladding is a metal coating bonded onto another metal under high pressure and temperature. The Massachusetts Institute of Technology recently emphasized its importance, as it stated that improved nuclear fuel-rod cladding might prevent a future disaster like that seen at Fukushima in Japan. With regards to any political concerns, adopting the technology would not produce any materials that can be converted into nuclear weapons. Further, the company has stated less waste would be generated as well, benefiting the power plant's natural surroundings. Implementing the technology also lowers costs The company's inventions also promises to nuclear plant operators a total cost savings several times the total cost of installation. In our view, this is a great deal for these operators. So besides more power output and more safety, averaging down costs is the third great feature that should attract customers on a mass scale. CEO Seth Grae mentioned: ""There are real cost advantages that essentially put this in line with coal on the overall generating costs for electricity," Strong patent portfolio should protect monopoly position Lightbridge holds exclusive patents that should protect its monopoly position. As one can imagine, the advantage of being a first-mover is that the patents could turn out to be the most valuable. The patents are long-term assets, with the first not expiring until 2027, and have a global reach. Unlike questionable short-term software patents of certain overhyped companies, Lightbridge patents are based on laws of nature and are therefore more robust and valuable. There are no shaky delayed court rulings or other uncertain win-or-die events at play. Apart from the patents, we are not talking about some low-barrier market from a research and development point of view. It takes many years for any potential competitor to develop, test, validate and market a competitive innovation, let alone the high costs involved. Is there no competition at all? Here's a newsflash: Lightbridge's main competitor USEC (USU) filed for bankruptcy just two days ago. There are some start-ups out there like Terrapower and NuScale Power, but these entities are still in their early stages, which stands in stark contrast with Lightbridge. Impressive management board Lightbridge has a remarkable management team on board, including an experienced international lawyer focused on generating revenues from patents in America, Europe and Asia. It is also led by a former manager at nuclear utility Exelon (EXC). Lightbridge is staffed with veterans and successful business leaders with decades of experience from diverse areas of interest such as international politics, nuclear design, and nuclear commerce. Examining their curriculum vitae, we were impressed. Such a diversity of knowledge and experience is rare for a micro-cap. The nuclear power market is big, and about to become a lot bigger Everybody knows nuclear power is big, but let's assess how big it exactly is. According to the World Nuclear Association (WNA), the installed power generating capacity of currently operating nuclear power plants worldwide is approximately 375 Gwe (Gigawatt Electric Capacity). WNA's reference scenario projects a total of 225 GWe of new nuclear generating capacity will be added by 2030, resulting in approximately 600 GWe of installed nuclear power generating capacity. In dollar terms, the existing plants are expected to spend over $400 billion nuclear fuel through 2030, while the new-build plants are projected to spend nearly $120 billion. Management estimates the size of Lightbridge's initial target market worldwide is estimated to be approximately 148 Gwe and projected to grow to 269 GWe by 2030, which translates to $205 billion now to $372 billion by 2030. If Lightbridge were to capture just a fraction of that spending, it would multiply its current market cap by at least 50X. Lightbridge is already generating revenue It's good to know that Lightbridge is already generating some revenue. Apart from the technological segment, Lightbridge has a consultancy segment that has been generating revenue for years now. Its advisory services are helping commercial entities and governments with the development and regulation of their nuclear power plants to expand electricity generation capabilities. Annual revenue reached $7 million in 2010 and 2011, but the Fukushima disaster cut this in half to $3.5 million in 2012. You can imagine 2012 was a tough year for all nuclear power related stocks. But the future is now much brighter. Lightbridge recently signed up two large customers. Firstly, they signed up Babcock & Wilcox (BW), one of the largest nuclear companies in the world with the capacity to make nuclear fuel for the U.S. and world markets. The two companies are now studying the joint development of a pilot scale facility to demonstrate fabrication of Lightbridge's nuclear fuel in the United States. A definitive agreement is expected to be signed in early 2014. The pilot scale facility could produce Lightbridge metallic fuel for lead test assemblies for the first uses in existing commercial reactors in the United States, and later be expanded for larger scale commercial production for US and international markets. Secondly, Lightbridge was selected for consulting work in South Korea. The tasks focus on key safety issues. The South Korean government is keen to bring in the best expertise and it is therefore telling that Lightbridge has been selected in the process. Lightbridge is financially healthy Let's analyze the current financial status. Lightbridge operates at a loss due to the high research and development costs, but annual losses are decreasing. The company recently completed a public offering with net proceedings nearing $4 million. Cash per end of September 2013 was near $1 million. Cash burn is about $1 million per quarter, so Lightbridge is fully funded for at least a year. The company has no debt. With the recent landing of two large customers and likely future sign-ups, revenue is set to grow again. Management stated in the latest SEC filing: "..Our current plan is to seek external funding from third party sources to support a large portion of the remaining development, testing and demonstration activities relating to our metallic nuclear fuel technology. We are currently in discussions with fuel vendors/fabricators regarding entry into commercial agreements to support our research and development activities and further enhance the development of our fuel products. Though we are unable to provide a reliable estimate as to the likelihood or timing of any such commercial agreements, we hope to be able to announce significant progress in these endeavors in early 2014..." Given the current stage in the company's life cycle, we think its financials are healthy and shareholders should not have to worry about dilution next year. We applaud the company for seeking partnerships and avoiding any form of debt-financing, which significantly limits the risk factor. What could Lightbridge be worth? Let's first determine when any material revenue stream could commence. The next overview shows Lightbridge is entering its final phase: lead test assemblies in a commercial reactor operation. (click to enlarge) This is the ultimate step before regulatory approval. This means Lightbridge's technology could fully hit the market by 2017. We already assessed the target market is going to be worth $200 billion at least. This is the total spending by all players in the industry, so let's conservatively assume just 1% is being spent on innovation and licensing. It is clear Lightbridge is in a pole position, so as a first mover it is likely to capture a large share of that 1%. Let's assume 50%. That makes 200 billion X 1% X 50% = $1 billion revenue. With a price/sales ratio of just 2, Lightbridge could be a two billion dollar stock. But we expect some dilution underway. We factor in a double of the total amount of shares outstanding, so we eventually come up with a one billion dollar market cap. Market cap now is just $20 million, implying a 50X return on investment in a 3 to 5 year timeframe. Why is the share price so low? Given the story so far, it is remarkable the share price is so low. We have seen such a level of mispricing before; read a previous article of ours about Plug Power (PLUG). Shares rallied 250% in a very short time-frame as soon as the market woke up to developments we anticipated in detail, and the best is even yet to come. A completely ignored micro-cap positioning itself as a monopolist in a giant addressable market could be the beginning of a fundamental, long and parabolic rally, ultimately rewarding patient investors a 50X or even 100X return in the process. Sounds unrealistic? Priceline (PCLN), Microsoft (MSFT), and Apple, to name a few, prove otherwise. In this case, we believe Wall Street is totally oblivious to Lightbridge's superior technology, extremely valuable patents and potential monopoly on the nuclear power market. There are no professional analyst reports, and the last focus article on Seeking Alpha was published 2 years ago. Activity is scarce at other online discussion boards. Such an under-the-radar profile generally does the share price no good, as is the case with Lightbridge. But as Wall Street discovers this story, the company's share price could appreciate significantly. What didn't help either was, of course, the Fukushima disaster. Nuclear power stocks got hit hard in the aftermath. No surprise there but history proves Fukushima is, luckily, a very rare event. As a matter of fact, Lightbridge's innovations are aimed at preventing disasters like this from happening in the first place. There is simply no rationale why nuclear power plants would not implement this technology. We think and hope, for the safety of all of us, governments and commercial entities embrace what is in everybody's best interest: more power, more safety, less costs. What's the risk? Lightbridge's superior technology, extremely valuable patents, lack of competition, debt-free balance sheet, under-the-radar profile and undervalued shares make the downside risk limited. Also, unlike biotech which becomes riskier with each stage of approval, Lightbridge becomes less risky as it progresses through stages of testing and validation. But we can highlight a few risks. Lightbridge still operates at a loss. Because the company avoids debt financing, shareholders could expect, according to the latest SEC filing, dilution early as Q1 2015, in case the company is still incurring losses. Further, any negative news surrounding nuclear power could harm the share price. Events like the bankruptcy of USEC two days ago, which dragged shares of Lightbridge lower, could happen again. Also, a more extreme event like a Fukushima type disaster could occur. We hope it won't, but one can never be sure. Lastly, there is the risk of any delay in the roll out of the business model. The regulatory licensing and approval process may be delayed and made more costly, and industry acceptance may be hampered. Any hiccup could stall revenue growth for an uncertain period. Things should go according to plan though, so there is no apparent reason to assume any delay, but it's certainly within the realm of possibilities. Technical chart indicates excellent buying opportunity (click to enlarge) Conclusion At this point Wall Street doesn't understand Lightbridge's superior technology, extremely valuable patents and potential monopoly on the nuclear power market. Nor do investors yet realize the importance of nuclear power plants around the world adopting a safer, more efficient and more cost-effective technology. From our perspective, the company's licensing business model, expert management team and limited downside risk makes this an ideal asymmetrical trade. The company is addressing such a large market and shares are so extremely undervalued that patient investors could be rewarded an unbelievable rate of return. As a matter of fact, it would not surprise us if shares of Lightbridge are to repeat the 50-100x rises at Priceline, Microsoft and Apple which made stock market history.