Nuclear Fusion’s Funding Rush Comes With a Catch

As nuclear fusion technologies move towards commercialization, the industry will need hundreds of millions, if not billions of dollars of new capital, either from public or private sources, in order to grow. Two nuclear fusion companies have chosen to access the public capital markets via special purpose acquisition corporations. (SPACs).which are often referred to as “blank check companies” because investors give money to a sponsor, typically an investment bank, to find a good business to invest in, without knowing in advance where the money will go.

Before going into specifics, we should explain how a SPAC works. It is an equity vehicle that affords the issuer both advantages and disadvantages over a conventional equity offering via an initial public offering (IPO). There are two principal advantages to SPACs from an issuer’s perspective. They can be offered more quickly than an IPO, and they also do not require pesky financial details like earnings forecasts and cash flow projections. SPACs are a financing vehicle for companies with big ideas, lots of potential, but zero revenues. There are two major downsides to this financial structure, though. First, the sponsor takes a big chunk of the equity as its fee, so there’s a lot of equity dilution right at the outset, like 30%+ dilution. The sponsors typically also receive warrants, which, when exercised, further increase the stock float and exacerbate dilution. And then there’s the phantom equity problem. SPAC investors can demand their money back from the sponsor, typically $10 per share if no investment has been made. However, the outstanding shares are not retired, and this also exacerbates a stock dilution problem.

We think equity investors should regard SPACs the way fixed income investors differentiate between junk bonds and investment-grade securities. They’re both bonds except that the risk profile of the former is much greater than that of the latter. It would not be completely inappropriate to think of SPACs as the equity market equivalent of “junk” bonds, that is, a security that affords investors far fewer protections (and entails higher risks) than higher quality equity investments.

As if to prove our point, one of the first nuclear fusion companies to form a SPAC, TAE Enterprises, formerly Tri Alpha Energy, did so in a 50-50 merger with the President’s Trump Media and Technology Group, the owner of Truth Social. The CEO of TAE, and Truth Social’s CEO, former congressman Devin Nunes, were to be co-heads of this new venture. Mr. Nunes has been fired. Nevertheless, TAE is a real technological competitor in the nuclear fusion race. Its newest reactor, called Copernicus, uniquely uses hydrogen-boron fuel (versus deuterium-tritium in more conventional systems). The advantage is a great diminution in radioactive waste, but the extreme temperatures needed, 1-5 billion degrees Celsius, pose ignition challenges. TAE previously raised over a billion dollars from Google, Chevron, and others and, like everyone else, expects to have a commercial reactor operating in the early 2030s. TAE’s field-reversed configuration of magnetic confinement loosely resembles a tokamak, but with a much simpler, cheaper architecture.

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A second company, General Fusion, announced plans to go public via a SPAC shortly after TAE. Its sponsor, more conventionally, is a Dallas-based investment bank, and its SPAC is called the Spring Valley Acquisition Corporation III (that’s Roman numeral three). Deal number one, by the way, was the SMR company NuScale. That deal is expected to close some time around mid-year, and the company plans to be NASDAQ-listed under the stock ticker GFUZ. General Fusion describes its magnetized target fusion (MTF) technology as a more practical fusion alternative to both tokamak and laser-driven systems. The value of this transaction was expected to be about $1 billion at closing.

Lastly, we want to mention Zap Energy which is developing the so-called “sheared flow stabilized Z-pinch fusion technology” and is often cited as next in line to go public in some form. Zap has raised over $300 million dollars from Bill Gates’ Breakthrough Energy Ventures, Chevron, Mizuho, Soros Foundation, and others. Zap’s website describes the company as “building a seriously cheap, compact, scalable fusion energy technology with potentially the shortest path to commercially viable fusion and (using) orders of magnitude less capital than traditional approaches.” Zap’s website also teases the competitors with a large headline stating, “No Magnets Needed.”

People often ask us whether SPACs are an appropriate investment vehicle for typical retail investors. The short answer is no. The long answer is also no, by the way. And that’s for a simple reason. These SPACs are not businesses in the conventional sense of the term. They are late stage research and development projects looking to establish a technological proof of design or a working prototype. They will consume vast amounts of capital for research with no associated revenues for years. And who knows which of these competing technologies will ultimately prevail in the energy marketplace and which will be discarded as ultimately impractical. In a way, the SPAC financial format, as we suggested earlier, is like a non-investment grade rating, but for equities, which should serve as a warning for potential investors. It’s a high cost, high risk financial structure, but perhaps one not inappropriate to the business of trying to capture the sun in a magnetic bottle as some have labeled the pursuit of nuclear fusion.

By Leonard Hyman and William Tilles for Oilprice.com

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