Bruno del Ama: Smart Money Flocking to Uranium
Source: Brian Sylvester of The Energy Report 11/23/2010

Gold has dominated a lot of headlines lately, so when Bruno del Ama of Global X Funds launched an exchange traded fund (ETF) focusing on the precious metal and another on uranium, he was confident about which one would set off at a sprint. Yet surprisingly, sales of the Global X Uranium ETF have reached $65 million since its launch on Nov. 4, making it one of the most successful ETFs this year. In this exclusive interview with The Energy Report, Bruno discusses why the smart money is chasing uranium.

The Energy Report: Bruno, you recently launched a number of ETFs focusing on gold, lithium and uranium. There are some others in the works, too. Do you view the ETF market as being underserved?

Bruno del Ama: I think the ETF market is underserved in some ways and saturated in some other ways. It's an interesting dynamic. In certain areas of the market, there may be five, six or seven ETFs that are very similar, tracking the same segment of the market and very highly correlated with each other. We view these market segments as saturated. However, other areas are not very well served, particularly when it comes to some commodity markets or equity-related commodities; for example, the gold, lithium, uranium and copper markets. More focused offerings for these markets allow sophisticated investors to go a little further than just a diversified commodity investment and really get deep down into the areas in the commodities markets where they see the most potential.

TER: What do you see as being the main attraction of ETFs compared to similar investment vehicles?

BDA: There are a number of advantages compared to traditional mutual funds. Typically, the expense ratios tend to be lower. ETFs also offer more targeted investments that are not usually available with traditional mutual funds.

But perhaps the most important advantage is a tax advantage. Due to how new shares are issued and redeemed for ETFs versus traditional mutual funds, investors who are trading in and out of the fund have no consequence on the long-term investors. One of the problems with mutual funds is that as investors trade in and out of the fund, they are creating a tax consequence as the fund buys and sells shares to meet that liquidity. ETFs are a more tax-efficient vehicle.

Another important feature is that investors have complete transparency about the investments. On our website, Global X Funds, investors can monitor all of the holdings in our portfolio on a daily basis—exactly how many shares and the dollar amount. That's something people value, particularly looking back at some of the issues that have occurred in the past three years with the lack of liquidity and transparency with some financial products.

The other problem with other products, such as exchange traded notes (ETNs), is credit risk. In a fully invested equity ETF, such as all Global X Funds ETFs, all of the assets are segregated and owned by the investors. Therefore, there is no credit risk to a note provider.

TER: Is that what appeals to institutional investors about your funds?

BDA: These characteristics are what make ETFs appealing versus other types of investments. The value of the Global X Funds, in particular, is that they provide access to areas of the world that we believe will perform well over the long term. We define that by looking at what the markets will look like 25 years from now and offering access to areas of the world that really aren't offered or covered by anybody else in a nice cost-effective package.

One example of that is the Global X Uranium ETF (NYSE:URA). We received calls from the Schedule I banks in Canada: Royal Bank of Canada (RBC), Toronto-Dominion, Bank of Montreal (BMO). Basically, they all said the ETF was the talk of the town.

TER: Because the ETF is the first of its kind?

BDA: Exactly. There's no uranium ETF or uranium-focused fund dedicated to the main uranium companies anywhere. This is indeed the first of its kind.

TER: Do you have an extensive research team behind you to identify those trends and opportunities in such places, those not necessarily apparent to others?

BDA: We do have a development team that focuses on identifying the themes we find interesting. We see significant opportunities in global commodities, cleantech and emerging markets where we expect substantial growth. We want to find the best opportunities that aren't really offered by any other exchange traded fund out there.

We partner with the best index companies to cover those particular markets; for example, we just filed for a TSX Venture ETF that will cover the most liquid companies of the Venture exchange in Canada. We will be licensing that index from Standard & Poor's and leveraging its research team to provide access to that particular market.

TER: Your firm recently launched both uranium and gold ETFs. Much to your surprise, sales of the uranium ETF are outpacing those of the gold ETF.

BDA: Yes. We brought two products to market over two days. The Global X Gold Explorers ETF (NYSE:GLDX) focuses on gold exploration companies, which is a particular segment of the gold mining life cycle. It's a very early stage and high-risk segment with potentially high rewards. We also launched the Global X Uranium ETF that tracks the performance of uranium mining companies globally. We think these two trends will do very well over time.

Based on the incredible interest in gold today, we did expect that the Gold Explorers ETF was going to generate more interest from investors. They've both been a huge success thus far with investors, but the success of the uranium fund has been incredible. In just a matter of days, we attracted $65 million in assets. It is one of the most successful launches of any ETF this year. We were surprised because we expected both products to be successful, but we didn't expect the uranium product to be as successful as quickly—or that it would be more successful than the gold product.

TER: What is the net asset value of the uranium fund?

BDA: The initial NAV on November 4th was listed at about $15. As of yesterday, the NAV for the uranium fund was $17.73.

TER: One of the reasons the fund is doing so well is due to the somewhat remarkable rebound in the price of uranium oxide. Adam Schatzker, an analyst with RBC Capital Markets in Toronto, said, "It appears that the character of the spot market has changed markedly over the past few months from one that was heavily oversupplied with weak demand to one that is in high demand with very little supply." Do you agree with that?

BDA: That is the case. Yes.

TER: What do you believe is responsible for that turnaround?

BDA: The long-term supply and demand dynamics were already in play to provide an adjustment in price. It was just a matter of time as to when that adjustment in price was going to take place. From the supply side, there hadn't been much investment in uranium mines for years. The supply has been fixed for a while, and it takes some time to bring new production in line as prices start to adjust. With regards to demand, there are a lot of investments in new nuclear reactors, which are the biggest users of uranium. And some uranium supply was provided by the decommissioning of nuclear warheads, but that is coming to an end.

In light of these trends, the prices had to adjust. There was a trigger, however, that caused the adjustment in such a short timeframe. As the Global X Uranium ETF went to market, China Guangdong Nuclear Power Corporation entered into a 10-year agreement to buy uranium at a price that was well above the spot price at the time of the announcement. That really woke everybody up. China has shown its hand and indicated that if other buyers want to secure uranium supplies over the long term, it's not going to cost what the price was in the spot market at that time.

TER: Are you concerned about volatility in the market given the rapid rise in the uranium oxide price?

BDA: Sometimes these commodity markets are sleepy for a long time and there's not a lot of volatility on the price of the commodity itself. Supply and demand dynamics are very long-term dynamics. Those take a long time to build up, and that's been going on for a while. The deal I described above with China was the trigger that woke up the market and made it obvious that uranium was mispriced.

We are seeing a significant amount of volatility right now as the market is trying to realize exactly where the clearing price of uranium should be. The value of uranium miners is also experiencing volatility as analysts and investors reassess the value of these companies. These companies produce uranium at flat rates but can now sell uranium at a higher price, resulting in higher margins and valuations. In a way uranium miners provide a leveraged play with regards to the underlying price of uranium. Periods of dislocation like this occur when investors have the opportunity to generate outside returns before the market settles down into a price and the valuation of the equities become more established.

TER: Roughly 20% of your uranium ETF is in Cameco Corp. (NYSE:CCJ; TSX:CCO). With that much of a weighting toward Cameco, why should investors choose your ETF over direct investment in such a company?

BDA: Cameco is a big holding of the fund because it represents a significant share of global uranium production. That still leaves 80% of the fund invested in 22 other global uranium miners. A lot of these companies are listed in Canada but also in other markets globally, such as Australia or the UK. Investing directly in Cameco is potentially a better proposition if an investor believes the company is potentially undervalued relative to the entire uranium market. But if an investor wants to have diversification across the uranium market, Cameco is not the best way to invest. They get better exposure by having the whole uranium-producing market, and the ETF is a better mechanism to achieve that.

TER: Mining company BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) made a takeover offer for fertilizer maker PotashCorp (NYSE:POT; TSX:POT). The offer hit some roadblocks and BHP ultimately withdrew it. Could you see a similar bid come in with a company like Cameco?

BDA: Potentially. When there is significant dislocation in a market that has attractive supply and demand dynamics, insiders that have a good sense of where the market is going have an opportunity to purchase companies at potentially attractive valuations. These conditions in the potash market are also present in the uranium market, and we think mergers and acquisitions (M&A) activity is possible as companies try to take advantage of these trends, secure additional supply or build a larger market share. Any acquisition of a uranium mining company would likely increase valuations for the sector as a whole, which would bode well for the prices of these companies and the returns of the uranium ETF.

TER: Tell us about some of the fund's other holdings.

BDA: Other companies include, for example, Uranium Energy Corp (NYSE.A:UEC), Ur-Energy Inc. (NYSE:URG; TSX:URE) and Mega Uranium Ltd. (TSX:MGA), which is a Canadian company with uranium resources in Australia and uranium exploration projects in Australia, Canada and Cameroon. Uranium Energy Corp is interesting because it has recently commenced uranium production using in-situ recovery (ISR) methods in South Texas. This marks the first revitalization of uranium mining in the U.S. in more than five years. Although the U.S. has very significant uranium resources in the ground, it currently imports the overwhelming majority of its uranium for fueling its nuclear power plants.

Uranerz Energy Corporation (TSX:URZ; NYSE.A:URZ) has applied for licenses for in-situ recovery of uranium in Wyoming, where the U.S. has the largest known uranium resource base, and plans to begin production by 2012. It also has long-term contracts to sell the uranium to the top U.S. nuclear generators, one of which is the third largest in the world, Exelon Corporation (NYSE:EXC).

TER: Why are you holding those particular companies?

BDA: This ETF, as with most ETFs, is a passive one. We track an index maintained by a third party, Structured Solutions, which is an index company that has particular expertise with commodities and resources. The ETF is comprised of the largest and most liquid uranium mining companies, wherever they may be in the world, so long as they generate most of their revenues and resources from uranium.

TER: Do you think you will have some competition in the future?

BDA: Clearly, this is an area where there's significant interest. It's entirely possible that someone else wants to participate in the market.

TER: Any parting thoughts on the uranium market and the ETF business?

BDA: A lot of smart money is going into the uranium market right now. There seems to be a bit of a dislocation currently—perhaps an opportunity. The supply and demand dynamics are driven by nuclear plants being built all over the world. China is making massive investments to build 45 reactors, but there are projects across the board in South Korea, Japan, Russia and so on. The uranium market is getting a lot of smart-money interest.

The ETF market has some advantages. It's a targeted, cost-efficient package for investors. The market as a whole continues to grow rapidly. We are actually one of the fastest-growing ETF companies in the world, having just crossed $1 billion in assets. We see a lot of opportunities to bring interesting products to investors, such as the TSX Venture ETF I mentioned and a number of other products we have in the works.

TER: Ok, great. We look forward to seeing what you debut next. Thanks for your time today, Bruno.

Bruno del Ama is the cofounder and CEO of New York-based asset manager Global X Funds. The company is dedicated to developing innovative ETFs focusing on emerging markets, global commodities and cleantech resources. Global X Funds has more than $1 billion in assets under management, and BlackRock has ranked the company as one of the fastest-growing ETF providers in the world year to date.

Prior to Global X Funds, del Ama served as head of operations in the structured products business at Radian Asset Assurance. Before that, he was a senior consultant at Oliver Wyman, advising leading financial services firms in a range of strategy matters. Bruno del Ama is a CFA charter holder and received his MBA from the Wharton Business School.

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