nuclear blast

Uranium is the energy investment of choice for a growing number of hedge funds, who say a sixfold gain since 2001 is just the beginning of a rally that will last years.

"We're in a historic uranium shortage," James Passin of New York-based Firebird Management told Bloomberg. "We're in a global nuclear revival."

Uranium achieved a record $60/lb in 2006, and may rise to $70 by January after a flood at Cameco Corp's Cigar Lake mine, says Jean-Francois Tardif of Sprott Asset Management, headed by Eric Sprott. Bob Mitchell at Adit Capital Management LP says $80 to $100 a pound is possible.

Even with new mines, growth in the supply of uranium is straining to keep up with demand from utilities. Production from five of the six largest mines in Canada, Australia and Namibia fell in the first half from a year earlier, according to Nukem Corp, which is a Danbury, Connecticut, United States-based uranium trader.

In October, the main shaft at the Canadian-based Cigar Lake project, which was seen producing around 17% of world mine supply at full capacity, flooded after a rockfall, which will delay production by at least a year to 2009.

James Thomson, who manages the £30m Rathbone Global Opportunities fund, told Reuters that the flooding at Cigar Lake was one reason the uranium sector had yet further to run.

Power producers are paying record prices for uranium to run plants that produce 16% of the world's electricity. Russia plans to make nuclear power the source of 25% of its needs by 2030, from 16% now, creating a state-run company to compete with Paris-based Areva SA.

Demand for nuclear energy is bolstered by government efforts under the Kyoto Accord to limit emissions of carbon dioxide and curb imports of fossil fuels.

Australia, home to 40% of the world's known uranium deposits, says it may build a nuclear industry that can compete with oil and coal within 15 years. "It is a very tight, producer's market," said Robert Godsell, chief executive officer (CEO) of Johannesburg-based AngloGold Ashanti Ltd, whose gold mines also produce enough uranium to meet the needs of Electricité de France SA, the world's biggest provider of nuclear-energy.

"We're very optimistic about the long-term price of uranium because it's the only alternative to coal- and oil-based energy on scale," he says.

The spot price of uranium has advanced 45% on average in each of the past five years, based on data from Roswell, Georgia-based Ux Consulting, which is a pricing benchmark in the nuclear industry.

That beats the average annual gain of 23% for copper and nickel on the London Metal Exchange.

"There's nothing to stop the rally in uranium, unless nuclear has a big accident," said Thomas Neff, a physicist and uranium industry analyst at the Massachusetts Institute of Technology (MIT) in Cambridge, US.

The industry's worst accident, the explosion and fire that killed almost 50 at Russia's Chernobyl plant, happened in 1986. Since then, "we've had 20 years of low prices," said Neff.

He adds:"The cost of that is there had been virtually no investment in new mining projects."

Passin's Firebird Global Fund has earned average annual returns of 46% over the past five years. Passin is the largest shareholder in Summit Resources of Perth, Western Australia, and has also been a "long-time holder" of uranium explorer UEX Corp of Vancouver.

Thomson, meanwhile, said he has increased his position in Australian-listed Paladin Resources, which now accounts for around 2.5% of his fund, and also owns a position in UrAsia of 1.4% of his portfolio.

"There is more [upside] to go. There are lots of futures markets in metals, which mean you get a lot of investors gambling... Uranium precludes a lot of the speculative activity because the price is a genuine one between supply and demand."

Since July last year, when Thomson took on sole management of the Global Opportunities fund, it has delivered it's investors a total return of 20.5%.