Denison's Dreary Disclosure

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Are you wondering why uranium outfit Denison Mines (AMEX: DNN) is down in the dirt today? Look no further than the "going concern" warning in the notes portion of its year-end financial results.

This dreaded going-concern language -- auditor-speak for "almost dead" -- has recently haunted other firms, including General Motors (NYSE: GM) and Crox (Nasdaq: CROX). Uranium's no fad, so what's going so wrong at Denison? What has pushed it to place all U.S. exploration on hold and hire a bank to explore strategic alternatives?

Well, uranium's spot price is certainly an issue. U308 peaked in the summer of 2007, and has been dropping ever since. The energy metal was in the vanguard in this respect, with "Dr. Copper" and other metals muscling higher until the summer of 2008.

Denison finds several of its producing assets suddenly subeconomic. For example, two of five mines on the Colorado Plateau have been placed on temporary standby. The Tony M Mine in Utah is also on "care and maintenance."

Denison is also seeing new mining developments postponed, such as the Midwest Project and Caribou Deposit at McLean Lake. Joint venture partner and nuclear heavyweight Areva is the operator on those projects, so the economics must be challenging indeed.

But it would be a mistake to simply place blame for Denison's implosion on the uranium price. Let's not overlook the serious corporate missteps here.

With uranium falling as the firm entered 2008, Denison went ahead and spent $20 million on exploration for the year, on par with 2007's outlay. Compared to cash flow of about $16 million before changes in non-cash working capital, this level of spending was not well supported by the operating business. Denison funded its ambitious program with a $125 million credit facility, which remains about 72% drawn even after a dilutive equity raise in January.

Now, Denison finds itself scrambling to conserve cash and stay on the right side of its debt covenants.  

Denison has a few options. It can try to sell assets piecemeal. It can offer a large equity stake to a Japanese trading house like Mitsui & Co (Nasdaq: MITSY) or a utility like Exelon (NYSE: EXC). There's even a chance it could offer the whole package to recently cashed-up Cameco (NYSE: CCJ).

Whatever the case, Denison's not bargaining from a position of strength. So while the firm may find some kind of lifeline, shareholders can't count on getting a great deal.

Related Foolishness:

• Despite many setbacks, Cameco's more confident than ever.
• Its woes actually made Denison look like a decent bet last summer.
• Here's another uranium miner that's fallen on tough times.