Resource Investor - Interviews - Uranium Market Still Has a Long Way to Run

Uranium Market Still Has a Long Way to Run



LONDON (ResourceInvestor.com) -- As the name suggests the Geiger Counter fund [LSE:GCL] focuses on the uranium and nuclear energy markets. It was launched last July at 50 pence per share (as covered in a previous Resource Investor article), and has since enjoyed almost uninterrupted growth, with the price more than doubling to close today at 104 pence.
The independent investment advisor to Geiger Counter is NCIM (New City Investment Managers), a company established in 2004 with a flying pig as a logo, on the basis that the directors regularly hear presentations from potential investee companies who hope that their business proposition is going to flourish, yet often there is a greater chance that pigs may fly!
Here Andrew Ferguson, co-fund manager and one of the founding directors of NCIM, talks to Resource Investor about the uranium market and the fund.
RESOURCE INVESTOR: Could we start with a look at the fundamentals of the uranium market. What is your view on the outlook for uranium demand?
ANDREW FERGUSON: As your readers will be aware, sentiment towards nuclear energy is enjoying something of a renaissance, and there is an increasing amount of media interest. It is now recognised that nuclear energy can tick a lot of boxes. On the one hand there is growing concern about the impact of hydrocarbon use on global warming and carbon emissions; governments are agreeing on the need for greener alternatives. On the other hand we now live in an unsure world where security of supply is increasingly an issue. Nuclear reactors can be sited onshore with no dependence on the Middle East or on Russian pipelines. France was far-sighted when it took the decision after the oil crisis in the 1970s that it did not want to be beholden to others; now 79% of its electricity is nuclear generated.
At the moment there are some 440 nuclear reactors worldwide which are used to provide baseload energy. These need a predictable 180 million pounds of uranium every year - you don’t just turn reactors on and off - and these reactors are much needed with electricity generation already in near crisis.
Looking ahead, demand for electricity will undoubtedly increase as the world continues to industrialise. And demand growth for uranium is in the pipeline as a significant number of new reactors are already under construction or planned, especially in China, Russia, India, Brazil, Japan and the U.S.A. It is interesting to note that Russia has stated that it will build 20 nuclear reactors – what does this tell you about their perception of the long term outlook for domestic oil and gas supply?
With the improved sentiment towards nuclear energy I think that the demand for uranium will remain very strong for a long time to come.
However a fly in the ointment which might hold back the actual consumption of uranium could be bottlenecks caused by labour shortages. During the 20 year bear market in uranium – the price fell to just $7/lb in the 1990s - there was no interest in the metal. No money was put into the industry and the number of people trained in the exploration and production of uranium, and those experienced in reactor construction dwindled – there is a lost generation of uranium specialists.
RESOURCE INVESTOR: And what about the supply side? At present new production is running at about 105 million tonnes each year, which fulfils only 60% or so of demand. How do you see that changing?
ANDREW FERGUSON: Uranium is not an uncommon metal. There is plenty of it in the ground. However there are many things conspiring against the production of it including geopolitics (a number of countries are not supportive of uranium mining), the weather, (look at ERA’s flooded Ranger mine in Australia), difficult geology (think of the rock burst at Cameco’s [NYSE:CCJ; TSX:CCO]Cigar Lake), native issues, long lead times (Cigar Lake was discovered in 1981 and is still not in production), and, as already mentioned, the missing generation of uranium specialists.
All that said, supply will eventually increase to meet demand. But it won’t happen overnight. It will take at the very least 5-6 years, and supply-side shocks are likely.
RESOURCE INVESTOR: In July 2006 when you launched the fund the uranium price was $45/lb. It is now $90/lb. What is your view on the price outlook for uranium in the short, medium and long term?
ANDREW FERGUSON: In the short term I can easily see it spiking above $150/lb. There is nothing to stop it. Demand for uranium is currently 180 million pounds a year while supply is 105 million pounds. Moreover demand by end-users is inelastic. The big expense in nuclear energy is the capital costs with the uranium feed accounting for just 7% of the total cost of production of nuclear fuel. As I have said already you don’t just turn a reactor on and off and walk away; they need constant attention. Then there are the hedge funds who are further squeezing the market by buying up the metal which would otherwise be available to the utility companies.
In the medium term too the price will remain high in view of the supply deficit, though whether it will trend above $100/lb is difficult to say. Again the hedge funds will have an impact.
Long term the price is anyone’s guess - but my guess is that it will come down from current levels but still stay robust, probably above $75/lb. Nuclear energy has a good future and the market will warm to the fact that even “greenies” are now saying that nuclear energy is one of the best ways to proceed. It will not be a total replacement for other fuels, but it makes a good bedfellow for hydrocarbons. If it can increase its market share above the current level of 16% of world electricity production then the future is indeed bright. Any price setbacks should be small.
While at the fund we don’t believe everything we hear – in fact we are paid to be sceptical and to keep our feet on the ground – we still believe that the story is good and that uranium has a long way to run.
RESOURCE INVESTOR: Turning now to the Geiger Counter fund why was the fund set up, and what is your investment objective and policy?
ANDREW FERGUSON: We were set up to fill a much-needed niche in the market. A few years ago there were just a dozen or so uranium companies in the world. Now there are close on 500 in Canada, Australia and the U.K. alone. It is difficult for investors to plough their way through them all, so a fund is a natural sub-contract for investors to have some exposure to the uranium space. Since launching last July the fund has truly gone global. The concept of a ‘new’ class of energy that has been overlooked has captured the imagination of many. We get daily calls and emails from people round the world wanting to know how to buy shares in the fund.
The objective of the fund is simply capital growth. The uranium market is not yet sufficiently developed to pay dividends so there is no point in pretending that we will pay a yield. We provide opportunities for yield through other funds that we run.
The mandate is all encompassing. We can invest in anything in the uranium and nuclear fuel sector from the metal itself through to explorers, developers, producers and integrated companies such as Areva [Euronext Paris:CEI].
RESOURCE INVESTOR: Please tell us about the type of assets you currently hold. What are the major holdings and how many do you have in total? What is their geographic spread? And what development stage do you favour?
ANDREW FERGUSON: We currently have about 50 holdings with a global spread in a mix of asset classes, including the metal itself and equity in a number of explorers, developers, producers and service providers to the industry. At the moment our biggest holdings are in SXR Uranium One [TSX:SXR], Energy Resources of Australia [ASX:ERA], Nufcor Uranium [AIM:NU], Wildhorse Energy [ASX:WHE] and Paladin Resources [TSX:PDN; ASX:PDN].
Our preference is for companies that have mineable pounds in the ground and are near to production. We look for sensible projects, with a quality management team and board who will respond to changes in the uranium market. We want to be sure that we are well positioned on the high ground, and that we are steering clear of some of the more colourful but fanciful characters in this industry.
We try to think in front of the market, and to anticipate what the market will be looking for as the uranium market progresses to the next stage.
RESOURCE INVESTOR: And what experience do the directors of the fund bring to the table?
ANDREW FERGUSON: You can read the details of the director’s experience on the NCIM website. In short they are shrewd, extremely well versed in fund management, and good custodians to us as independent investment advisors. One of the directors, Terry Ward, is a mining engineer whose extensive and varied career included running Rio’s Mary Kathleen uranium mine in Australia for 8 years.
RESOURCE INVESTOR: Looking ahead what do you see as the biggest risks to the uranium market over the next 12-18 months?
ANDREW FERGUSON: This is a question that we make ourselves ask daily so as not to get too wrapped up in the uranium hype. Perhaps two risks should be mentioned.
One is the risk that another disaster, such as Three Mile Island or Chernobyl, could cause sentiment to change again, away from nuclear energy. This is definitely a consideration, particularly as nuclear energy spreads to countries which may not have stringent health and safety standards.
The other risk, albeit a left-field one, is that a strategic stockpile of a few million pounds could hit the market. The U.S., for example, still holds a strategic stockpile. But it is called strategic because it is precisely that. It seems unlikely that this would be sold just to provide a temporary solution to electricity production.
RESOURCE INVESTOR: And where do you think that the main opportunities will lie in the uranium sector over the next year or so.
ANDREW FERGUSON: They will almost definitely lie with those who can get uranium above the ground in the near future to take advantage of the high uranium price. Make hay while the sun shines!