Uranium processor and would-be miner Denison Mines (DNN 3.05%) could be one of the world's lowest-cost producers of this key nuclear fuel. However, there's still a lot of work to be done before its key mine project gets under way, and now there's another headwind to deal with. Here's some key facts investors need to know to decide if Denison Mines is a buy today.
1. Uranium has a potentially bright future
Uranium prices nosedived after the Fukushima nuclear disaster in 2011. That meltdown, precipitated by an earthquake and tsunami, led Japan to shut all of its nuclear fleet and prompted other countries around the world to rethink their use of nuclear power. Subsequent low uranium prices, meanwhile, led to a material pullback in production across the uranium mining industry. It has been a brutal ride for miners, but the drop in production looks like it will set up the next rally, as industry watchers believe there will be a shortfall of uranium over the next couple of decades unless new supply comes to market.
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Uranium is a commodity, so supply/demand imbalances can lead to huge price swings. That's what happened when demand fell off following the Fukushima disaster, with the opposite very possible now that supply has been constrained. Uranium prices have already started to recover a little, with uranium industry giant Cameco noting that there are still over 50 new reactors under construction. The uranium sector has been a difficult space in which to operate, but it looks like brighter days could be ahead.
2. A good project
Denison has two main assets. It owns 22.5% of the McClean Lake uranium mill, which processes around 12% of the world's uranium. The bigger attraction here, however, is the company's 90% interest in Wheeler River, a uranium mine development project comprised of the Phoenix and Griffon mines. Combined, the two mines are projected to have a 14-year mine life and 109 million pounds of probable reserves. Plus, the company believes, based on its pre-feasibility studies, that Phoenix could have among the lowest production costs in the world. If uranium prices strengthen, the Wheeler River project could be a very enticing asset.
3. A long way to go
That said, the current development plan calls for mine construction to start in 2023, with production beginning in 2024. Leading up to those dates are a series of regulatory approvals. The good news in this is that the current timeline would push production off to a point when uranium's supply/demand equation could be tilted more heavily in favor of uranium producers. The bad news is that COVID-19 has caused Denison to put some of its plans on hold, warning investors that the current timeline shouldn't be relied on. The upshot is that, even in the best-case scenario, Denison wouldn't be producing uranium for another three or four years. Based on the current environment, though, the best case is highly unlikely to unfold, so there's a great deal of uncertainty right now.
4. Mines cost a lot of money to build
One of the key talking points for Denison was that its ownership in an active uranium processing mill provided it with capital that it could use to build the Wheeler project. However, that mill is now shuttered, and Denison has already used the mill to support a complex financing deal. All told, it won't be as big a help on the funding front going forward, which means that Denison will need to come up with the cash to build the Wheeler project in other ways. Historically, that's meant selling stock, with each new sale diluting current shareholders.
DNN Average Diluted Shares Outstanding (Annual) data by YCharts.
Meanwhile, Denison's spending will remain elevated until the now-uncertain date that it starts to produce uranium from the Wheeler project. That will mean a continuation of the losses the company has been incurring for years already. That's not a knock on Denison, since building a mine is a costly undertaking. However, investors have to understand that the red ink here will continue to flow for many years to come.
The final call
Long-term investors considering Denison have to weigh the risks and potential rewards offered by the Wheeler project. There are reasons to be positive, notably including the potential that the Phoenix mine could come on line right when uranium demand and pricing could be starting to rise. However, with the current project delays caused by COVID-19 and the large sums of money needed to complete the construction process, there are also material uncertainties today. Right now, all but the most aggressive investors are probably better off waiting until the project is further along before committing to Denison.
