What happened
Shares of Denison Mines (DNN -2.37%) surged on Thursday and were up more than 11% at 11:45 a.m. EST. The catalyst was Cameco's (CCJ -2.56%) decision to suspend production at two of its facilities due to weaker uranium prices. Those suspensions, however, could boost prices, which in theory would benefit other uranium industry companies like Denison Mines.
So what
Cameco announced Wednesday that it would temporarily suspend production at its McArthur River mining and Key Lake milling operations at the end of January. CEO Tim Gitzel said:
With the continued state of oversupply in the uranium market and no expectation of change on the immediate horizon, it does not make economic sense for us to continue producing at McArthur River and Key Lake when we are holding a large inventory.
Image source: Getty Images.
Gitzel believes these actions will cushion the company in the near term and ensure its long-term sustainability. That's because they will allow the company to sell off some of its excess inventory via existing contracts instead of continuing to produce more than the market needs, which would result in it building its stockpile up further.
Analysts saw the move as a massive catalyst for the industry because McArthur River is the world's largest uranium mine. Its closure will take 12% of global supplies off the market, significantly reducing the gap between production and demand. That should eventually bring market fundamentals back into balance, which could help prices recover some of the 70% they've lost since the Fukushima disaster in 2011.
Now what
While higher uranium prices would benefit producers, they wouldn't directly impact Denison's bottom line since it isn't producing any uranium at the moment. The company is still in the development stage, and is currently working with Cameco and another partner to develop a large uranium mine in Canada. That mine won't start producing until 2025 at the earliest, which means Denison wouldn't benefit from any near-term market improvement. That long lead time, as well as the fact that it's still a development-stage company, makes Denison an ultra-high-risk uranium stock, which is why investors should just watch this one from the sidelines.
