What happened

Shares of Denison Mines (NYSEMKT:DNN) fell in dramatic fashion on Oct. 8, dropping by roughly 21% in early trading. By noon EDT the stock was still down by a painful 18%, holding on to most of the loss. The company's latest effort to fund its long-term capital investment plans was the culprit. 

So what

Denison Mines' primary asset is the Wheeler Project, which consists of two uranium mines. Neither of the two mines are even under construction yet, with the first not even scheduled to break ground until 2023 at the earliest. And that assumes that all of the approvals needed are received and that, given any environmental or regulatory pushbacks, the project still makes economic sense. The problem is that conceiving of and constructing a mine is a complicated, lengthy, and expensive process. Denison has been bleeding red ink for a decade as it works to bring its plans to fruition.  

A man in a suit shooting hundred dollar bills off of a pile in his hand

Image source: Getty Images.

The primary way the miner funds the expenses it faces is by selling shares of stock. Over the past decade the share count has increased by around 85%, including an equity sale earlier in 2020. The problem is that each additional share sold dilutes existing shareholders. Today investors are facing yet another stock sale, with Denison set to sell 47 million shares of stock at $0.37 per share. The underwriters were granted the option to buy another 7.05 million shares. Denison's stock closed at roughly $0.45 per share on Oct. 7, so it makes sense that the stock would decline on this news. And that doesn't even take into account the stock dilution issue.     

Now what

Denison Mines is not an appropriate investment for risk-averse investors. It is working to build a mine and is still in the relatively early stages of the process. There's little way to tell at this point if it will succeed or not. However, it is very clear that Denison is using a great deal of cash, raised through equity sales, and that each new share issued reduces the claim of existing shareholders. There may be a huge material upside here if the company's uranium mines get built. But only if they actually do get built. Conservative types should probably wait until there are actual mines before considering this high-risk mining investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.