Uranium fund a new way to play

Considering all the recent buzz around uranium, surprisingly little has been done in the way of investment vehicles that would give investors better exposure to the hot commodity.

But that is changing, thanks in part to people like Richard Lockwood, who, along with mining engineer Andrew Ferguson, manages Geiger Counter (GCL-L), a fund specializing in uranium companies.

Run out of the offices of New City Investment Managers in London, Geiger Counter is listed on the London Stock Exchange and is currently trading in London at the 56-pence range.

“We just manifested what other people were thinking,” Lockwood says about launching the first uranium-only fund.

“The rationale behind setting this up was to carve out a niche in the market by buying emerging companies a year or so away from production,” he says.

More specifically, Lockwood is looking at Australian companies that are positioned to benefit from what he believes is the inevitable end to the three mines policy in Australia that has prohibited the building of new uranium mines in the uranium-rich country.

“Potentially, Australia will be the biggest producer of uranium,” Lockwood says. “So we have to have a position there.”

With the federal government in favour of mining uranium, and only some provinces opposed, Lockwood expects to see the law changed by the end of next year — two years ahead of what many other experts anticipate.

As companies that will be in a good spot to get to production should the moratorium end, both Uranex (URNXF-O, UNX-A) and Summit Resources (SRCSF-O, SMM-A) get the nod from Lockwood.

Summit is exclusively based in Australia. The company’s uranium deposits and prospects are located within 70 km of the city of Mount Isa in Queensland, allowing it to have a development plan based on a single processing and recovery plant.

Summit holds a 50% interest in, and is the manager and operator of, the Isa Uranium joint venture with Valhalla Uranium (VHLAF-O, VUL-A). Both Summit and fellow Australian-based Paladin Resources (PDN-T, PALAF-O, PDN-A) have made bids for Valhalla, and while Lockwood calls Summit’s bid more logical — given the joint venture — Valhalla backed Paladin’s $150-million offer of one Paladin share for every 3.16 Valhalla shares. Summit’s shares are currently trading in the $1.25 range.

And while Lockwood likes Uranex for its two uranium targets in Australia, the company is better known for its 26,000-sq.-km Bahi exploration property in Tanzania. The project hosts two anomalies, with early drill results returning highlights of 0.207% U3O8 and 0.119% U3O8. Uranex shares are trading in the 50 range.

While Geiger Counter is still a smallish fund at this point — it manages roughly $32 million in assets — Lockwood says the aim is to bring it up to over $100 million within six months.

One thing that bodes well for the fund’s future growth is that the stigma attached to nuclear energy is gradually fading. While Lockwood says the stigma in Australia is stronger than in the U.K., he believes revenue potential and education as to how minimal the risks have become will bring the Aussies around as well.

“Until Blair spoke on it,” Lockwood says, referring to British Prime Minister Tony Blair’s endorsement of new nuclear reactors in May, “you were almost a social pariah to speak on the subject.”

Not that everyone in the U.K. is on board, but with neighbouring France producing nearly 80% of its energy from reactors without incident, the tide, Lockwood says, has turned.

Like any fund manager, Lockwood’s interest in establishing the fund had less to do with breaking social stigmas and more to do with recognizing investment opportunity. He cites the dramatic turnaround of the company that controls almost all of England’s nuclear power, British Energy (BGY-L) as a big impetus for starting up the fund.

After a complete collapse, British Energy recently rebounded to become a member of the FTSE 100 — the London Stock Exchange’s top 100 list. Lockwood says such strong market support spurred him and Ferguson to investigate uranium.

“The more we looked into it, the more we began to realize how much is being done with nuclear energy around the world,” he says.

Lockwood has been in the resource investment game since 1969, Ferguson, for 10 years.

World electricity demand is expected to increase 74% by 2025, and internationally, three to four new nuclear plants are coming on line each year through 2010 — with India and China driving that growth.

The resulting increase in demand has experts predicting further constraints on supply going forward. Already, it is estimated that 180 million tonnes of uranium is consumed per year, while only 90 million tonnes is being mined — the remainder has been met by inventories, Russian stockpiles and recycling, and the conversion of uranium from Russian warheads for use by nuclear reactors.

And while Lockwood is big on uranium in Australia, the joy of managing a fund is that it offers investors a chance to participate in the hot metal across the investment spectrum.

So while finding smaller companies that will go into production is key, Lockwood is also bullish on the big producers and lists French giant Areva and Canadian stalwart Cameco (CCO-T, CCJ-N) as two of the fund’s largest holdings.

Also part of the mix are consensus safe bets Paladin and SXR Uranium One (SXR-T, SXRFF-O).

Paladin recently announced the commissioning of its plant at the Langer Heinrich mine in Namibia a month ahead of schedule. The mine is expected to initially produce 2.6 million lbs. U3O8 per year. The company also has a significant uranium asset in Malawi dubbed the Kayelekera project, which currently has a resource estimate of roughly 8.5 million tonnes grading 0.13% U3O8 for about 10,700 tonnes. Paladin shares are trading in the $4.35 range.

SXR has completed feasibility studies for two of its uranium projects — the Dominion project in South Africa and the Honeymoon project in South Australia. The company also holds a 75% interest in Aflease Gold, which owns the Modder East gold project in South Africa, and through a joint venture with Pitchstone Exploration (PXP-V, PEXPF-O), is exploring for uranium in Saskatchewan’s renowned Athabasca basin. SXR shares are trading in the $8.70 range.

And lest investors be wary of a fund that doesn’t offer direct exposure to uranium prices, Geiger Counter’s largest single holding is in Nufcor Uranium (NU-L). Nufcor operates like an exchange-traded fund, taking large holdings of uranium so that investors can participate, should the commodity’s price continue to surge.

But with the recent rush into uranium, is there really much more room for growth? After all, there have been roughly 150 uranium-related IPOs in Canada in the last year, and more than 50 in Australia. Prices have continued their upward march, gaining 35% since January; uranium is currently at US$52 per lb.

Lockwood clearly believes uranium has further potential. While he concedes that the current supply crunch can’t go on forever, he says the lag between supply catching up to demand will be in the 5-year range.

“I wouldn’t be surprised to see it get up to sixty dollars (U.S.) a pound by next year,” Lockwood says. “It’s hard to see demand going anywhere but up in the immediate future, as we’re seeing a market that isn’t well supplied.”