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Is Denison Mines a Buy?

By Reuben Gregg Brewer - Updated Aug 19, 2019 at 8:32AM

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This tiny upstart uranium miner has a lot of potential, but the realization is years away. Is it worth buying shares today?

Denison Mines' (DNN 0.00%) primary asset is the Wheeler River Project, a uranium mine site that it hopes to have up and running by 2024. The company has some pretty rosy projections for what it can achieve; that said, conservative types shouldn't even be looking at Denison, since it's still in the early phases of building the project.

However, is the stock a good buy for more aggressive investors? Here are some key facts to consider.

The good news

Denison has two mines in the works at the Wheeler River project, Phoenix and Griffon. It expects to produce an average of around 7.5 million pounds of uranium per year over the combined 14 year life of the two mines. It believes it will open Phoenix in 2024 and have an operating margin of 89%, largely based on an expectation of low operating costs and $29-per-pound uranium prices (around 15% higher than where uranium is trading at today). Griffon is projected to start producing in 2030 and have an operating margin of around 77%, assuming uranium prices are at $50 per pound (double the current spot price of uranium).

A visualization of an atom in a cupped pair of hands

Image source: Getty Images

Denison's 22.5% ownership stake in the McClean Lake uranium processing facility is helping the company get from here to there. Unlike the Wheeler Project, this facility is up and running, processing uranium for uranium giant Cameco Corp (CCJ 1.51%).

Lastly, Denison and other miners (like Cameco) expect to see improving uranium demand in the future from the nuclear power industry, their primary customer. The projections here are backed by the 53 nuclear power plants currently under construction today, a large number of which are being built in Asia. As those power plants come online, demand for uranium, and the price of the nuclear fuel, are expected to increase.

The bad news

At first glance, the outlook for Wheeler and Denison sounds pretty alluring. However, there are some troubling issues that should cause even aggressive investors to pause. For example, the Phoenix mine isn't expected to break ground until 2021. That's still a few years away. And it won't start producing any uranium until 2024, even further away. A lot can happen in four or five years. Griffin, meanwhile, won't break ground until 2026, with first production scheduled for 2030. That's even further away, increasing the uncertainty of the overall project.

Then there's the not-so-subtle issue of profitability. Phoenix is projected to have an 89% operating margin, but only if uranium prices increase by 15%. That's not so bad, though there are material questions about the company's estimates being overly positive, especially when comparing its profitability projections to those of miners like Cameco. The bigger issue is Griffin, which is expected to have an operating margin of 77% -- but only if the uranium price nearly doubles to $50 per pound. That's a pretty aggressive assumption to make for a commodity that has spent far more time below $50 per pound than above it. Simply put, Denison is painting a very positive picture that may not work out.

The company's ownership stake in McClean Lake, meanwhile, is great, but already tapped. In 2017 the company inked a streaming deal with Anglo Pacific Group that provided Denison CAD$43.5 million in cash upfront in exchange for Anglo getting the revenue from McClean Lake for 13 years. So it's wonderful that Denison owns 22.5% of McClean Lake, but right now it's not going to provide any additional financial help in funding the Wheeler project.

And that means that money-losing Denison, facing material construction costs, will need to keep tapping the capital markets for funding. Issuing stock has been the main approach, with each new share sold diluting current shareholders. This is no small issue: Over roughly the last 20 years, Denison has increased its share count by more than 900%. That number is only going to go higher from here.

DNN Average Diluted Shares Outstanding (Quarterly) Chart

DNN Average Diluted Shares Outstanding (Quarterly) data by YCharts

The one piece of the story so far that seems to rest on solid ground is the 53 nuclear power plants that are currently under construction. The problem is that they still need to be built, and sometimes things go wrong. For example, U.S. utility SCANA Corp was forced to scrap its plans for a nuclear power plant when its contractor, Westinghouse, filed for bankruptcy. (SCANA was subsequently bought by Dominion Energy.) So there's still a little uncertainty here. And despite the outlook for nuclear construction, uranium prices are still relatively weak, with Cameco recently describing prices as "increasing but still low." All in, it remains far from certain that uranium demand and prices will pick up materially from here.

Best avoided for now

The upside for Denison's stock could be huge if everything works out as the company is projecting. But there are a large number of variables that could easily fall short of the company's rosy expectations. At this point, investors are better off avoiding the stock. That's particularly true for conservative types, but even aggressive investors should be concerned that time will prove Denison's projections overly optimistic. Taking a wait and see approach makes more sense.

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Stocks Mentioned

Denison Mines Corp. Stock Quote
Denison Mines Corp.
$1.13 (0.00%) $0.00
Cameco Corporation Stock Quote
Cameco Corporation
$23.46 (1.51%) $0.35

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