New Star fund of funds team reap rewards of Uranium price surge

The price of uranium has increased eightfold during the past three years, driven by a large supply/demand imbalance. The entrance of speculative buyers in the market has seen the price surge to $85/lb in recent weeks, its highest-ever level, with many predicting a rise to $100/lb this year.

Mark Harris, Head of New Star Fund of Funds, says: “This is an important long-term theme underpinned by the willingness of governments to consider alternative fuel sources, the resurgence of the nuclear industry and positive forecasts for growth in world energy demand, particularly from China and India. We already had significant exposure to the mining sector and have been investigating opportunities in uranium for the past four years but, until recently, UCITS constraints made it difficult to access the full potential of the market.”

MARKET ENVIRONMENT

With global energy consumption escalating dramatically, more and more attention has focused on the potential shortage of commonplace natural resources needed to produce this energy, hence the realisation of the need for alternative energy sources such as nuclear power. This in turn has led to a glut of media coverage and political debate. President Bush has been a strong proponent of the move to alternative energy sources. In his 2007 State Of The Union Address, he announced his "Twenty In Ten" Plan to reduce US gasoline usage by 20% in the next ten years and reduce dependence on oil. Environmental issues are also increasingly on the mainstream political agenda with concerns over the global warming effects of burning oil, natural gas and coal. While anomalous events such as the Chernobyl accident in 1986 gave the nuclear power industry a bad name, significant leaps in safety in the industry and the quest for cleaner alternatives are leading many to reassess the benefits of nuclear power.

As companies look to cash in on the global revival of interest in nuclear power, merger and acquisition activity in the sector has picked up significantly. Only last month, Canadian mining company UrAsia Energy agreed to a reverse takeover by rival sxr Uranium Oneto create the world’s second largest uranium producer. This sent other uranium mining shares up on hopes of further consolidation in the sector. Geological events have also played an important role in price rises. In October last year, market leading uranium company Cameco said its Cigar Lake mine in Saskatchewan would not open until 2009 at the earliest because of problems caused by a large rock fall, exacerbating concerns about uranium shortages.

The lion’s share of today’s uranium production is concentrated in a few regions around the world with Australia, Canada and the Former Soviet Union accounting for more than 70% of the mined uranium in 2005. Despite these significant deposits much of the mining is subject to long-term agreements, so there is considerable potential for the discovery of additional economic resources, particularly as higher uranium prices are now stimulating increased exploration. Meanwhile, demand continues to climb with the number of nuclear reactors either planned or under construction meaning a 60% increase from the current 441 reactors, all of which will require fuel.

INVESTMENT REVIEW

Prior to conversion to non-UCITS status in October 2006, the New Star fund of funds principal uranium exposure was via Oceanic ACDS Australian Natural Resources, which has around 8% of its portfolio in uranium stocks. The adoption of the new rules allowed the team to take advantage of a number of changes including the scope for wider investment in vehicles such as specialised investment trusts. Since then the exposure to uranium has been selectively increased across the funds and this has reaped significant rewards.

The team’s exposure to New City Investment Managers’ Channel Islands-listed company Geiger Counter is a key example. Launched in July last year, Geiger Counter invests in companies involved in energy exploration, development and production, focusing on uranium and nuclear services companies. It has been among the main beneficiaries of the uranium boom – the share price rising from 51p at launch to £1.06 in just over six months. The trust has been added to the New Star Tactical and American portfolios in recent months.

The uranium market, like all commodity markets, has a history of volatility, moving not only with the standard forces of supply and demand, but also to whims of geopolitics therefore careful selection remains vital within the context of a balanced portfolio. Unlike many of its commodity counterparts, a lot of the uranium suppliers are in politically secure areas such as Australia and Canada.