Denison Mines (DNN -0.50%) has big plans for uranium mining, which means two things for investors. First, you have to believe that nuclear power will be a material piece of the global energy market in the future. And then you have to believe that Denison and its mines can live up to the company's promises, since it doesn't actually produce any uranium today. Here's what you need to know to decide if Denison Mines is worth buying.
A glowing dream
Uranium has been a pretty rough commodity to invest in for a while now, even though prices are up off the lows they hit in 2016. In fact, despite the swift rise in 2020, uranium still only fetches around half the price it did in 2011. While low prices hurt in the near term, they generally help to balance out long-term supply and demand because producers usually curtail output when prices are weak. That's taken a bit of time to work through the uranium market, but it is happening, with some of the largest miners in the space having shuttered mines.
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Meanwhile, demand for uranium is expected to grow in the years ahead as new nuclear power plants get built (largely in Asia) and stockpiles of uranium get used up. On top of that is the growing global demand for energy, as emerging markets (again largely in Asia) move up the socioeconomic ladder. Add it all up and there's an opportunity, with Denison suggesting that there won't be enough supply to meet future demand. This is why the company is building uranium mines.
Not ready yet
The thing is, the mines aren't even close to being done. Denison's main asset is the Wheeler River Project, which consists of two mines. The company is in the early stages of building the first, as it's still working on permitting and such. The mine isn't expected to be up and running until 2024. The second mine won't be operational until 2030. This timeline isn't so bad, given the low price of uranium today. If Denison is correct about the future of the uranium market, it might actually end up with mines opening right when demand is outstripping supply. Presumably that would lead to higher uranium prices and robust earnings for the company.
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Getting from here to there, however, is a big issue, because mines cost a lot of money to build. Denison generates some revenue from its partial ownership of a uranium processing facility, but the truth is that it spends far more on construction than it brings in the door. And it will continue to do so for at least a few more years. That means that it has to find cash from other sources to keep funding the Wheeler Project. Historically that's required selling additional shares of stock. This is a mixed blessing: On the one hand the miner has little to no debt on its balance sheet, on the other hand every new share it sells dilutes current shareholders.
If you can get past the timeline for Wheeler and the cost, you then have to consider the projections for the mines. Denison is projecting that the first of the two mines it's building will have production costs that are among the lowest in the world. That's a tall order and assumes a lot goes right along the way as it's built. If the mine doesn't perform up to expectations, profits won't live up to expectations either. Mines are complex projects, and sometimes they don't pan out quite as well as hoped, so this isn't an immaterial risk.
The second mine, meanwhile, is expected to have operating costs that are 2.5 times higher than the first. That's not nearly as compelling an opportunity, and really requires higher uranium prices to be worth the cost and effort to build.
Not for the faint of heart
All in all, there's a lot of uncertainty here for investors. Denison has a compelling story, but a lot has to go right for it to play out as hoped. As such, conservative types should sit on the sidelines until there's more progress on the Wheeler Project. Indeed, Denison is really a speculative play on the future of not only uranium, but also a tiny upstart miner. Sure, more aggressive types might like that idea, but most would be better off avoiding the inherent uncertainty here.
