The simple story is that Denison Mines (NYSEMKT:DNN) is a uranium stock. But the company is really much more complicated than that top-level view. Here's why you might want to buy Denison Mines stock, and why you might not.

The world needs power

Uranium is used in nuclear reactors to create electricity. Although nuclear power has a bad name because of high-profile disasters like Chernobyl and Fukushima, it is a fairly reliable power source. Meltdowns are just like airplane crashes, in that they are rare but newsworthy events that tend to elevate and accentuate the negatives in our minds. And, on the plus side, nuclear power doesn't emit greenhouse gases, so it is a relatively clean power source.

Nuclear Power Plants.

Image source: Getty Images.

Although some Western nations have sworn off nuclear power or have made it increasingly difficult to build new reactors, there are still plenty of new power plants being built. According to uranium mining giant Cameco, there are currently 54 reactors under construction right now. This development is being driven by the roughly-50% increase in electrical demand that is expected between 2019 and 2040, largely because developing economies are continuing to climb up the socioeconomic ladder. 

That said, the nuclear power industry has historically been driven by long-term supply agreements. But low prices in recent years have shifted the dynamic, and Denison is projecting a wide gap between a reduced supply and increased demand as older contracts roll off. What's more, the current low cost of uranium has led to mine closures and reduced investment in future production.

But that's where Denison's story really starts.  

The would-be miner

Denison isn't actually a uranium miner, at least not yet. It hopes to be one starting in 2024, when it plans to start production at one of the two uranium mines in the Wheeler Project. The second mine in the project is slated to come online in 2030. Denison owns 90% of the two-mine Wheeler Project, which is still working through the permitting process. It won't even start construction on the first mine until 2023, assuming the current timeline plays out as expected.  

Denison believes the timing here works in its favor. It will effectively be developing its mines right when the supply/demand imbalance it is forecasting will start to grow. The expectation is that its mines will be coming online at a time when uranium pricing could be stronger than it is today. That suggests there's material upside to the stock price.

That being said, things don't always go as planned, and it costs a lot of money to build a mine. So the positive outlook is, at best, an educated guess, and one that's being provided by a company with a vested interest in keeping investors positive. That's notable because Denison has been selling stock to help fund its development efforts. The money-losing company will likely continue to issue stock, and lose money, until it starts producing uranium (and perhaps even for a little while thereafter, given that full production levels won't be reached until 2025). 

DNN Average Diluted Shares Outstanding (Annual) Chart
Data by YCharts.

Meanwhile, uranium stocks appear to have gotten caught up in the short squeeze frenzy that has upended stocks from GameStop to silver miners. Denison Mines' stock price is up nearly 75% since Jan. 27, which is a huge gain in a very short period of time. So even if you buy the long-term story here and are willing to take on the risk that the company's plans don't pan out as hoped, you should tread with caution because market sentiment may not be rational right now. 

Watch it, for now

At the end of the day, most investors will probably want to err on the side of caution with Denison Mines right now. Conservative, and even moderate, investors will probably be best off waiting until the company has an operating mine, or at least one under construction, before jumping aboard. And even more aggressive investors will likely be better off waiting until the short squeeze craze has passed before buying. Denison will be issuing more shares to fund its investment plans -- a move that will likely put downward pressure on its stock. In other words, there's probably no need to rush here. 

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.