Solios Asset Management LLC has launched a new uranium fund that will buy and hold physical uranium for long-term gain.
The fund will consist of 75% physical uranium and 25% uranium equities, with the equities being used to hedge or enhance returns.
The Solios Uranium Fund launched on 1 September with seed money from the Solios Offshore Fund, and according to the firm, response has been very favourable. It is currently the only hedge fund offering a pure play on uranium. As an indication of market interest, there is a closed end fund that holds physical uranium and trades at a 30% premium to its NAV.
The exit strategy of the fund is to liquidate the physical uranium opportunistically, and return money to investors. Solios is also researching other specialized commodity plays.
The idea for the Solios Uranium Fund stems from research the firm carried out into nuclear power, which revealed that the prices of the uranium metal were less volatile and more consistent than the related equities.
Solios believes there is a substantial imbalance between the demand and supply for physical uranium for nuclear power plants. This imbalance has persisted for nearly 20 years, and the gap has been supplied by sales of excess uranium from military programs of Russia and the US. However, these stockpiles are largely depleted.
How will the demand be met in the future? For 20 years prior to 2003, the uranium mining industry was under-invested. It takes 10 years to bring a new mine into production because of lengthy environmental permitting and technology issues associated with lower grade and more complex ore bodies.
Uranium prices have increased from USD10 per lb in as late as 2003 to nearly USD 50 per lb today. Solios believes that uranium prices will continue to increase because supply will not meet demand until 2013. In real terms, the current price is still only about 42% of the price reached during the 1970s peak.
Demand for uranium is also strong. Nuclear power plants can continue to compete with fossil fuel-fired units, even supposing a several-fold increase in the price of nuclear fuel. Existing plants are being pushed to their limits: 92% operating factors last year, compared to 75% 10 years ago. Nuclear power does not contribute to global warming and some environmentalists are now big supporters. There are over 25 new nuclear plants under construction and more than another 150 in the planning stages.
Background notes: Solios CIO Mitchell Dong has been an entrepreneur in the energy business for over 25 years, having developed and operated hydroelectric and gas fired power plants. Solios Offshore Fund is a dedicated energy fund which trades electricity in US markets and runs a long short equity portfolio focusing on clean coal technologies, nuclear power, and alternative energy, including wind and solar power.