After On-site Visit to Natrium, Positive Outlook on SK Innovation’s Nuclear Option Value

Overview

This J.P. Morgan company research report is authored following a two-day on-site visit to TerraPower’s Natrium Small Modular Reactor (SMR) project in Wyoming, USA. The core conclusion is that SK Innovation, as TerraPower’s second-largest shareholder, is poised to benefit from the medium- to long-term (mid-LT) upside potential of this Generation IV nuclear SMR technology. The report maintains an Overweight rating and a June 2027 target price of KRW 165,000. While reviewing SK’s investment and collaboration progress, the report also dedicates significant space to an accessible overview of the SMR industry, Natrium’s technology, and its economics, and discusses South Korea’s nuclear energy strategy roadmap.

Core views

Investment & Collaboration Progress: In August 2022, SK Innovation and SK Inc. jointly invested USD 250 million in TerraPower (KRW 100 million from SK Inc., KRW 150 million from SK Innovation) to become its second-largest shareholder. In January 2026, SK transferred part of its stake to Korea Hydro & Nuclear Power Co., Ltd. (KHNP), forming a trilateral alliance: SK’s energy & materials capabilities + KHNP’s nuclear construction and operation expertise + TerraPower’s technology. Funding and demand are also ramping up: per Pitchbook, TerraPower has raised over USD 1.7 billion in total as of March 2026, including a USD 650 million round in June 2025 in which NVIDIA’s venture arm Nventures participated. On January 9, 2026, TerraPower and Meta finalised a partnership to develop up to 2.8 GW of Natrium capacity and support early development of two new units; Meta holds usage rights for up to six units. Technology Highlights: TerraPower was founded by Bill Gates in 2008. Natrium is a 345 MWe sodium-cooled fast reactor complemented by a pioneering molten salt energy storage system. Unlike conventional light-water reactors (LWRs), which require high pressure to prevent water boiling, sodium remains liquid at high temperatures, enabling low-pressure operation and reducing risks of pressurized failures. The design incorporates passive safety mechanisms (natural convection, gravity, and temperature-gradient heat dissipation) enabling decay heat removal without external power or active pumping—directly addressing the station black-out failures revealed in the Fukushima accident. Molten salt storage decouples heat generation from electricity generation, enabling flexible grid dispatch and positioning Natrium closer to a ‘dispatchable baseload’ resource. The fast neutron spectrum also improves fuel efficiency and reduces long-lived spent fuel volume. Natrium has been selected as one of only two demonstration projects under the U.S. Department of Energy’s (DOE) Advanced Reactor Demonstration Program (ARDP), receiving approximately USD 2 billion in authorized funding—covering nearly half of its development and construction costs. Industry Context (Why Now?): The report notes that large-scale cloud providers (hyperscalers)’ demand for 24/7 reliable, low-carbon power, aligned with net-zero goals, is catalyzing renewed nuclear construction. Over 30 GW of nuclear projects have been signed since October 2024, and AI data center power loads are reshaping electricity procurement. SMRs tout ‘safer, smaller, faster’: higher surface-area-to-volume ratios enhance passive safety (enabling ‘walk-away safe’ design); individual modules are typically <300 MWe, halving the land footprint per MW and allowing smaller emergency planning zones (EPZs); after maturity, unit construction timelines average 36–48 months (Natrium ~36 months)—significantly faster than ~5 years for conventional large reactors. Economics (Core Challenge is Cost): Current SMR levelized cost of electricity (LCOE) ranges widely—Lazard ~USD 141–220/MWh, DOE Liftoff ~USD 120/MWh, BNEF ~USD 180–230/MWh—still markedly above combined-cycle gas turbine (CCGT) plus carbon capture and storage (CCS) at USD 64–106/MWh. The report identifies a path to improvement via the shift from ‘first-of-a-kind’ (FOAK) to ‘nth-of-a-kind’ (NOAK) units: MIT analysis shows SMR FOAK LCOE at ~USD 194/MWh, falling to ~USD 95/MWh after mass deployment (a >50% decline). Near-term nuclear competitiveness hinges on U.S. tax credits: although the OBBBA Act broadly withdrew supports for renewables, advanced nuclear incentives (ITC/PTC under Sections 45U/45Y/48E) remain unchanged and are transferable for cash. DOE estimates that with USD 10/W capital expenditure and ITC included, SMR LCOE drops to ~USD 78/MWh (J.P. Morgan estimates Natrium’s initial capital intensity at ~USD 11.6/W). TerraPower’s CEO notes that roughly half of Natrium’s capex is labor and construction, and if 10 sites are built concurrently, labor costs could fall by up to 70%. SK states that units 6–7 can generate ‘adequate’ profit including ITC; from unit 9 onward, IRR may reach or exceed 9%. While overseas projects lack ITC, they may realize lower construction costs. Korea Strategy & SK’s Positioning: Korea’s nuclear generation share is among the highest in Asia (>30%, vs. ~10% in Japan, 5% in China, 3% in India), with ~26 GWe of installed nuclear capacity. According to the 11th Basic Plan (released March 2025), policymaker targets 34% more nuclear generation by 2038 to accommodate 8x projected data center electricity demand growth and phase-out of gas-fired generation, supported by two new large reactors (Sin Wolsong Units 3 & 4, 2.8 GWe) plus 700 MW of new SMR capacity. In February 2026, South Korea enacted the SMR Special Act, aiming for indigenization of both LWR and advanced reactor technologies by 2028/2030. SK is also exploring Natrium deployment in Korea (potential commercial operation by 2035) and select overseas markets. In valuation terms, U.S.-listed Generation IV SMR peers X-Energy and Oklo trade at capex of ~USD 1–1.1 billion, whereas SK Innovation’s market cap stands at ~USD 1.3 billion; J.P. Morgan estimates that the refining & chemicals business alone contributes ~54% of the company’s fair value—suggesting nuclear assets carry significant unpriced optionality.

Analysis framework

The report’s analytical thread follows: technology feasibility → inflection point in economics → policy & demand support → implications for SK’s valuation. It first verifies Natrium’s technical and safety features and key milestones (e.g., construction permit) via on-site visits, then evaluates commercial viability by benchmarking LCOE and the FOAK→NOAK cost reduction pathway against GRID parity. Regarding company valuation, J.P. Morgan applies relative valuation and a Sum-of-the-Parts (SOTP) approach: the KRW 165,000 target price is anchored on a 1x forward P/B ratio (cycle peak P/B, +1 standard deviation), reflecting optimism around SK’s ROE restoration (from -2.5% to 5.3% on average over 2026–28). The report cross-compare SK with U.S. pure-play SMR peers on a market cap basis and highlights that refining & chemicals already account for ~54% of fair value in the target price—implying TerraPower exposure and other assets carry additional, yet still underpriced, option value. For project economics, the report draws on third-party LCOE ranges and scenarios (Lazard, DOE, BNEF, MIT), and incorporates the cash value of U.S. tax credits (ITC/PTC), ultimately concluding ‘near-term靠 subsidies, long-term靠 scale and standardization-driven cost reduction’.

Methodology notes

• Valuation MethodologySum-of-the-Parts (SOTP) Valuation

  Valuing SK Innovation’s businesses (refining & chemicals, batteries, TerraPower nuclear investment) separately, then summing their values

  The report notes the refining & chemicals segment alone contributes ~54% of fair value in the target price—indicating other businesses (including nuclear investments) are valued separately. This typifies SOTP: for diversified companies with distinct business units, valuation separation clarifies value contributions and highlights underpriced segments (e.g., TerraPower stake).

• Valuation MethodologyPB valuation

  Using a one-year forward 1x P/B ratio (cycle peak, +1 standard deviation) as the basis for target price

  P/B (price-to-book) valuation is common for asset-intensive, cyclically profitable companies. Setting target P/B at cycle peak and +1 standard deviation above historical average embeds optimism about ROE recovery (from -2.5% to 5.3%), effectively converting earnings-cycle recovery expectations into a share price target via net asset multiples.

• Competition & Strategy FrameworkEconomies of scale / learning curve

  Cost reduction pathway from first-of-a-kind (FOAK) to nth-of-a-kind (NOAK) units

  FOAK→NOAK applies the conventional ‘learning curve’ principle from manufacturing to nuclear: the first unit incurs high one-time costs (R&D, licensing, first-time execution), while subsequent repeat builds benefit from standardization, repetitive construction, and multi-site parallel deployments—driving unit cost down significantly. The report cites this as the basis for SMR LCOE falling from ~USD 194/MWh (FOAK) to ~USD 95/MWh, a critical logic for SMR commercial viability.

• Industry / Sector Analysis FrameworkSupply-demand framework

  AI data center power load growth is driving nuclear and SMR demand

  The report uses a supply-demand lens to explain SMR momentum: on the demand side, surging 24/7 low-carbon electricity needs from AI data centers (and Korea’s projected 8x power demand growth) drive interest; on the supply side, nuclear capacity expansion and SMR commercialization respond. Recognizing that demand—not just policy—is pulling this sector helps assess the durability of the thematic.

• Industry / Sector Analysis FrameworkOthers

  Cross-technology LCOE comparison

  LCOE摊sheets all lifetime project costs (build, operate, fuel, etc.) onto per-kWh output, allowing apples-to-apples comparisons across generation technologies. Here, SMR LCOE is benchmarked against CCGT+CCS to gauge distance to gas parity, while tax credits are added to assess net economic competitiveness—a standard practice in evaluating new energy tech.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SK Innovation (096770.KS)

  Direct beneficiary of Natrium Gen-IV SMR commercialization progress and AI-driven nuclear demand as TerraPower’s second-largest shareholder; also the primary subject of this report’s coverage and rating

  Strengths

  TerraPower stake confers nuclear optionality; refining & chemicals contribute ~54% of fair value; post-restructuring, balance sheet stabilizes, 2027 capex down >20% from peak; trilateral alliance with KHNP, Meta, and NVIDIA offers industrial and financial validation

  Weaknesses

  Market cap (~USD 1.3B) exceeds U.S. pure-play SMR peers; valuation already discounts some nuclear upside; nuclear value realization depends on 2031+ commercial deployment and cost reductions—medium-term horizon

  Comparison

  U.S. Gen-IV SMR peers X-Energy and Oklo trade at ~USD 1.0–1.1 billion, versus SK Inno’s USD 1.3 billion; however, SK Inno’s value is mostly supported by legacy refining & chemicals, with nuclear as incremental upside

  Risks

  Low EV demand or OEM production pauses delay recovery in battery utilization in the U.S. and Europe; oil supply disruption or intensified domestic fuel price/export controls amid Middle East conflict; LNG supply disruptions or extreme weather causing surge in import costs

Key data

• Target Price / Current Share PriceKRW 165,000 / KRW 117,600 (as of June 4, 2026)Overweight rating, 2027 June target price, implies ~+40% upside
• SK’s Investment in TerraPowerUSD 250 million (August 2022)KRW 100 million from SK Inc., KRW 150 million from SK Innovation; resulting in second-largest shareholder position
• Natrium First Unit345 MWe, targeted commercial operation in 2031Received first U.S. NRC construction permit for an advanced SMR; construction timeline ~36 months
• Natrium Project IRR≥9% starting from 9th unit onwardIncludes ITC incentives; units 6–7 can yield ‘adequate’ profit (per SK statement)
• SMR LCOE Range vs. Gas~USD 120–230/MWh vs. CCGT+CCS USD 64–106/MWhCurrently 2–3x higher than gas-combined cycle
• SMR LCOE Including ITC (DOE)~USD 78/MWh (at USD 10/W capital expenditure)ITC contributes ~USD 48/MWh improvement; J.P. Morgan estimates Natrium initial capex intensity at ~USD 11.6/W
• MIT FOAK→NOAK LCOE ProjectionUSD 194/MWh → ~USD 95/MWh>50% reduction after mass deployment, achievable post-2050
• Meta Collaboration ScaleUp to 2.8 GW Natrium capacitySupports early development of two additional units; Meta holds usage rights for up to six units
• TerraPower Total Funding to Date>USD 1.7 billion (as of March 2026)USD 650 million round in June 2025 included NVIDIA’s Nventures
• Korea’s 11th Basic Plan SMR Target+700 MW SMR capacity by 2038Nuclear generation to increase by 34% by 2038 to accommodate 8x data center electricity demand
• Market Capitalization ComparisonSK Inno ~USD 1.3 billion vs. X-Energy/Oklo ~USD 1.0–1.1 billionSK Inno’s target price includes ~54% fair value contribution from refining/chemicals business
• ROE Outlook5.3% avg. (2026–28) vs. -2.5% avg. (2021–25)Supports adoption of cycle peak 1x P/B (plus 1 standard deviation) in valuation assumptions

Impact & implications

The report posits that SK Innovation is transitioning from ‘a Korean refiner burdened by its cash-burning battery subsidiary’ to a ‘consolidated Asian energy platform’ with a stabilizing balance sheet (2027 capex down >20% from peak, back to 2022 levels). The market still prices SK primarily around 2023–2025 battery losses, balance sheet deterioration, and weak refining dynamics. J.P. Morgan argues these negatives are largely reflected in current valuations—and on top of that, the TerraPower/Natrium investment adds medium-to-long-term upside potential. As Natrium receives construction permits, secures Meta and NVIDIA validation, and leverages robust U.S. advanced nuclear tax credits, its commercial and economic outlook improves— positioning it well for AI-data-center-level electricity needs. For Korea, the SMR Special Act and the 11th Basic Plan provide policy and demand backing; SK’s trilateral alliance is well-positioned to benefit. The report underscores that these are its own views only and do not imply any extrapolations to other securities.

Risks

• Slower-than-expected battery utilization recovery in the U.S. and Europe, due to weak EV demand or OEM production schedules
• Oil supply disruption or tighter domestic refined product pricing/export controls amid Middle East conflict
• Supply disruption or extreme weather causing a surge in LNG import costs

What to watch

• Progress of Korea’s 12th Basic Energy Plan (final draft expected July–August); whether new reactors will be added beyond the two currently planned
• Filing status and approval timeline for the.indigenous SMR (i-SMR) standard design (submitted March 2026; target approval by 2028)
• Construction progress and 2031 commercial operation target for Natrium’s first unit in Wyoming