UK Edition
Questor: this uranium trust is in the doldrums, but weakening supply means a recovery can’t be far away
We wouldn't normally tip a portfolio whose share price has fallen by 61pc since launch, but this week’s trust is unusual in more ways than one.
The trust is called Geiger Counter and invests largely in companies that mine uranium, the “fuel” for nuclear power stations, or firms that are involved in the uranium supply chain in some other way.
The reason for the fall in the trust’s value since its flotation in 2006 is simple enough: the price of uranium itself has been depressed as a result of the reluctance of many countries to build nuclear power stations. But there are also good reasons to expect a recovery.
“Uranium prices have remained depressed, having fallen from $156 per pound to the current $25 in the aftermath of the Fukushima accident in 2011,” said Nick Greenwood, who holds Geiger Counter in his Miton Global Opportunities trust.
But the amount of uranium being mined is well below the amount being consumed. The nuclear industry worldwide needs 175 million pounds of uranium to keep its reactors going, a figure that is expected to rise to 260 million pounds over the next decade, given that 64 plants are under construction and another 173 have been ordered, Mr Greenwood said.
By contrast, only 154 million pounds were mined in 2014 and estimates for 2015 production are 145 million pounds. Very little new supply is expected to emerge given that prices are so depressed, so “further declines in annual production to around 125 million pounds should be expected”.
This is less than half the expected level of demand in 10 years’ time, so “at some point the open market price for uranium will be squeezed significantly higher”.
Mr Greenwood added: “There is scope for a more dramatically profitable scenario should geopolitical concerns extend to Kazakhstan, which produces around half of global uranium ore and has recently cut production. This would leave the nuclear industry starved of supply.
The US has 100 existing reactors and another four nearing completion; it requires 50 million pounds a year but mines only 4.9 million pounds. Under such a scenario, Geiger Counter’s focus on North American and Australian miners would leave it extraordinarily well placed.”
Much of the gap between supply and demand is currently being met by stockpiles held in Japan, which no longer needs large amounts of uranium following its decision to reduce its dependence on nuclear power after Fukushima.
It is not known how much of the fuel remains in the stockpile, but at some time it will run out and buyers will have to look elsewhere for supplies. In the meantime, the existence of the stockpile and of a “forced seller” in the market acts as a drag on the price.
If and when a shortage does materialise, the motivations of the individuals who buy uranium on behalf of the industry could also play a part in a recovery in the price. Buyers know that, even if the uranium price were to increase many times over, it would remain a very minor part of the overall cost of running a nuclear power station.
They also know that a failure to secure supplies could lead to stations having to shut down, which is extremely costly and disruptive.
At the first sniff of a shortage, therefore, they are likely to lose interest in the price and concentrate entirely on securing the supplies they need.
The fact that many are civil servants, who would want to avoid being held responsible for embarrassing shutdowns for the sake of relatively minor expenditure, or through the appearance of administrative failure, should add to the buying pressure in the event of a shortage, Mr Greenwood said – all to the benefit of the price.
The trust currently trades at a discount of 9.8pc. It is managed by New City Investment Managers, which charges a 1.38pc annual fee.
Questor says: buy
Ticker: GCL
Share price at close: 18.6p
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