Since the Fukushima meltdown in Japan, nuclear power has been something of an unloved stepchild in the energy sector. Some nations have even sworn off the power source. But nuclear power isn't going away, and may be more important now than ever given the push toward lower-carbon emissions. Denison Mines (DNN 3.05%) is betting hard that demand for uranium, the key nuclear power plant fuel, will grow in the years ahead. But should you bet along with it?
Unmet needs
Since the Fukushima disaster in 2011, demand for uranium has fallen sharply, and prices for the fuel have declined to painfully low levels. Although historically based on long-term contracts, prices have been so low and demand so weak that some buyers have been willing to purchase on the spot market so they didn't have to tie themselves to what might have ended up being higher-priced long-term contracts. As a commodity, supply and demand are the key drivers of price, and major producers pulled back on the production front to help bring supply and demand back into balance. Prices have started to stabilize, but remain low enough that miner Uranium Energy (UEC 3.75%) is buying on the spot market because it is cheaper than the cost of mining the nuclear fuel.
Image source: Getty Images.
This sounds terrible, but there's a potential bright spot here. Uranium mining giant Cameco (CCJ 0.39%) highlights that there are 52 nuclear power plants under construction today. That's being driven by increasing demand for electricity in emerging nations, which need more and more power as their citizens climb the socioeconomic ladder. And since nuclear power plants don't release carbon dioxide, they are a clean source of reliable baseload power despite the negative image many hold of them.
So demand is likely to increase over time, while supply is being constrained. With this dynamic in mind, Denison Mines believes that supply will start to fall short of demand in a big way in the coming years, and its plan is to be there in time to help.
All about the future
You might wonder why Denison wouldn't want to help right now, or at least consider stockpiling uranium like Uranium Energy is doing. The answer is both the opportunity and the risk here -- Denison is hoping to build two mines at its 90%-owned Wheeler River Project in Canada. The first of the two mines is still in the early stages of the development process. If things go according to plan the mine will open in 2024, hitting full production in 2025. The second mine, largely still on the drawing board, is slated to come online in 2030, with full production by 2032.
Denison believes that the mines will have low operating costs, but this early in the development process it is hard to know if that will actually turn out to be true. What is quite clear, however, is that it costs a lot of money to build a mine, and the process takes a great deal of time. That means that Denison has a cash flow problem. In fact, it has bled red ink for years, and will likely continue to do so for at least a few more years to come. If you are going to buy this stock, you are making a bet that all of the spending will pay off in the end. That's not a deal that conservative long-term investors are likely to jump at.
DNN Average Diluted Shares Outstanding (Quarterly) data by YCharts
Meanwhile, Denison needs to come up with the cash it needs in some manner. That has historically involved selling additional shares. Over the past decade or so the share count has grown by roughly 85%. Each new share sold dilutes current shareholders, so there are material problems with this funding source for investors. The stock can also be pretty volatile, with news about stock sales, development progress, and the uranium market often causing huge price swings to the upside and downside. You need a very strong stomach to own Denison's stock.
Maybe wait
Unless you have a very strong feeling about the future of uranium, it is probably best to leave Denison off your buy list. That may change as it gets closer to bringing its mining dreams to fruition, but right now there are a lot of risks and nothing to back that up but costly construction plans. Until the company is producing uranium from its Wheeler Project, this is really only appropriate for aggressive investors. And even then you might want to consider uranium miners that have more material operations first.
