Mention uranium, and you are likely to provoke a variety of reactions. Some will remember only its associations with nuclear power and the Chernobyl disaster of the 1980s. Others will praise it as a practical fuel and an answer to climate change. But now another angle is emerging: uranium as an alternative investment vehicle.
Canny investors first began to take notice some years ago, when the price of uranium shot up from about $10 per pound in 2003 to more than $130/lb in 2007. The global financial meltdown sent it crashing down again, though it has hovered around the mid-$40s/lb ever since. But experts now believe recent developments could prompt serious price gains.
“Demand for uranium is on the increase thanks to a number of reactors due to come into operation over the next few years,” says Scott Lawrence, head of nuclear fuel at MF Global, the derivatives brokerage. “The growth is concentrated in the emerging economies where nuclear power presents an attractive, low-carbon option for baseload electricity production.”
There are already more than 400 nuclear power stations globally, but the World Nuclear Association predicts hundreds more need to be built to fight global warming. The British government has approved the installation of 10 new nuclear power stations. Decisions on at least as large a scale are expected in Germany, Japan, Italy, China, India and the US.
A recent report from private client investment manager Brewin Dolphin supports this view. “Many parts of the developing world are structurally short of power and building large numbers of nuclear power stations; this will lift uranium demand,” says Nik Stanojevic, analyst at Brewin Dolphin.
He also makes the point that uranium mining is relatively concentrated. “Kazakhstan now represents more than 20 per cent of global mine supply, and the authorities there have stated they intend to swap uranium mining assets for nuclear power stations,” he says. “It is in their interests not to allow the price to fall too far and to establish a floor to the uranium price.”
While energy traders have been interested in uranium for years, it has been a relatively closed market for investors. It was not until the New York Mercantile Exchange launched its first-ever uranium futures contract on its CME platform in 2007 that private investors could get really involved.
“The dynamics of the market have been changing,” says Lawrence. “Investors have been interested in the growth of nuclear power, and the opportunity to gain exposure to the price has become much easier to realise than in the past. The market for uranium has liberalised. As a result, we have gone from a monthly reference price to a daily spot price.”
In essence, a futures contract represents a commitment by the buyer to take delivery of a given amount of a commodity at a specified price on a defined date. If you bought a single December 2010 contract for $45/lb and the uranium price at the end of December was $50/lb, you would receive $5/lb on 250 pounds. If the price settled at $42/lb, you would pay out $3/lb.
An attraction of uranium as an investment is that it is largely uncorrelated to other assets. Its price does not move in line with those of other commodities, offering diversification potential in a portfolio. But while investors can access futures contracts through various brokers, the number of players involved in these markets remains small and the futures contracts are relatively illiquid.
Another way that investors can get exposure is via shareholding in exploration companies that are not yet producing uranium, or through companies with existing operations. Nick Raynor, investment adviser at The Share Centre, says he likes Kalahari Minerals and BHP Billiton. Kalahari’s shares have soared 291 per cent in the past year, and BHP Billiton has enjoyed growth on the back of the strength in commodities. Those looking to benefit from the expansion of nuclear energy in the UK could buy Centrica, which owns roughly a quarter of British Energy.
Buying shares in a specialised sector like uranium can be a risky strategy, however, because small-cap stocks can be highly illiquid, says Justin Modray, of website Candid Money. “Investors should bear in mind that uranium mining companies usually have long-term contracts to supply the nuclear power industry, potentially locking them into prices that could look unattractive if the price of uranium rises,” he says.
According to Modray, another way to gain access is through exchange traded funds such as the Market Vectors Nuclear Energy fund, traded on the New York Stock Exchange. This aims to track the DAXglobal Nuclear Energy Index, with uranium miners making up 40-50 per cent of the index.
There are also listed closed-ended uranium funds, which hold physical uranium on account and trade as any other listed equity. One such fund, Uranium Participation Corporation, currently trades on the Toronto Stock Exchange and presents some of the most correlated movements to the underlying spot uranium price. Another fund, Uranium Investment Corporation, is being launched and looks to raise between $71m and $142m, with 95 per cent of the proceeds invested in uranium funds over the next year. Investors looking for only a small exposure to the commodity can opt for a collective investment fund with limited involvement in uranium. JPM Natural Resources, for example, has had roughly 5-10 per cent exposure to uranium in recent years.
Not all analysts consider investing in uranium to be an uncomplicated one-way bet, however. Edward Sterck, equity analyst at BMO Capital Markets, believes the peak of the cycle of uranium prices has passed. He sees prices declining with increasing production.
“Even though production at new mines is bound to fall short of expectations, the sheer number of mines being developed suggests there will be excess production regardless,” he says.
But he also warns of supply risks. “The world will have to start relying on the politically uncertain regions of Niger and Kazakhstan.”
Though perceptions of uranium investment are changing, there is still much uncertainty. It is probably too soon for it to replace gold as the hot topic of dinner-party conversations.