A Nuclear Growth Opportunity with Denison Mines

by: Michael Filloon August 26, 2008 | about stocks: DNN    

Michael Filloon

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

In a very short period of time, we have seen the spot price of uranium drop by over 50% after massive speculation had pushed the price up. There was a time when uranium producers could barely make a profit, as only those companies with high grade uranium could sell for a profit. Uranium producers were among the agricultural companies as they had trouble breaking even. With countries like China leading the way, and current countries like Japan and France showing the viability in the market, these companies could see a great profit going forward.

I do like Cameco (CCJ) at this point as it is a huge producer and has great holdings with respect to yellow cake. This company is a buy now as it has pulled back on bad news about its Cigar Lake holdings and the constant flooding slowing its ability to begin producing. CCJ is a much more conservative holding based on their legacy contracts, and should be looked at hard at these prices.

If you are looking for growth Denison Mines (DNN) seems to be a very nice pick going forward. When looking at these companies, be careful as many are speculative names that are currently not producing anything or have no plans to start new mines for production. These companies move higher and lower based on the price of uranium alone. DNN is a production company and its growth numbers look good going forward.

DNN has been in the industry for over 50 years. It has assets in the United States and Canada, plus holdings in Zambia and Mongolia. The US and Canadian holdings are comprised of seven operational mines and two uranium mills. Last year's production was 683,000 pounds of U3O8, and this year's production will fall somewhere between 1.7 and 1.9 million pounds.

Looking forward, the company has plenty of growth. Its estimates project that 2011 could be a huge year. Low estimates have the company producing 3.6 million pounds, but high estimates have its production at 6 million. The main reason for the increase will be the start of production of its Zambian and Mongolian mines.

The largest reason the uranium producers will benefit is the nuclear renaissance that is under way. Supply and demand will increase the price over time as production continues to be less than demand. Due to the length of time it takes to get a mine up and running, it could be a long time before production will actually meet demand. Currently, 15% of world electricity is produced by nuclear energy, and this percentage will increase as there are 34 nuclear reactors under construction and over 90 are in the planning phase. In India, there are six reactors under construction and the country's goal is to have half of its electricity generated by nuclear energy by 2050. India will be a completely new market for uranium sometime in 2009 and it is working on contracts to purchase the United States's uranium.

If we are to compare nuclear costs to those of other energy sources, we find that nuclear is much cheaper. Many people disagree with the different sources sited, but that is mostly because in the United States we have no nuclear reactors of advanced technology. Our current reactors are old and out of date, and with this comes extra costs.

When the US Congressional Budget Office did its study in May of 2008, it found that operating costs including fuel, operations and maintenance were much cheaper when advanced nuclear technologies were used. Innovative clean natural gas technologies were $55/MWh, conventional natural gas was $41, innovative clean coal was $23, conventional coal was $20 and advanced nuclear was $16. This being the case, it is believed that many other countries will continue to pursue nuclear energy, further tightening supply.

DNN is interesting as it has started doing contracts with floor prices, with $45 per pound as the floor. These new US contracts are quite good as it was not long ago that uranium was selling for less than $10 a pound. Even more impressive is that their sales are 95% of the current long term price, which has been constant for some time even as the spot price has decreased dramatically. DNN has stated that all future contracts will be set this way, with appropriate floor prices and close to the current market, which takes much of the fluctuation out of the price of the commodity.

DNN has also made some interesting investments in other uranium exploration companies with decent sized assets. The first is Uranerz Energy (URZ), in which it has a 9.9% interest. URZ has current properties in Saskatchewan and Wyoming. These sites are currently under review by the NRC for licensing. It also owns a 10% equity interest in Energy Metals Limited [ASX:EME].

In summary, DNN will have increased its uranium production by over 200% from 2007 to the end of this year. Its combined uranium and vanadium sales will double revenue year over year. By 2011, its Zambian mine will be producing uranium, and probably its Mongolian mine as well. All of this will produce impressive growth going forward at much better prices than were seen just a couple of years ago. I would look for this company to be a great long term investment.

Related Articles

This article has 10 comments:

  •  
    Aug 26 12:41 PM
    did ccj's cigar lake mine flood again?
    Reply | Link to Comment
  •  
    Aug 26 01:26 PM
    Yes, CCJ is "under-water"... again, and that makes this article on DNN even more relevant. Appreciated how it was written and the details as well.
    Reply | Link to Comment
  •  
    Sep 11 11:06 AM
    The flooding at Cigar Lake seems to benefit all uranium companies as it will help to keep the price of uranium high. I like CCJ at these prices, but DNN seems to be a much better play. Thank you for your comments.
    Reply | Link to Comment
  •  
    Sep 11 05:27 PM
    To clarify, the mine did not "flood" again. The leak wasn't sealed like they thought it was. They started pumping the water down and noticed an inflow. The mine wasn't pumped dry and I am pretty sure they didn't even reach minning level in the shaft before they noticed the inflow and stopped pumping.

    If all else fails they can freeze the ground before they cut the drifts in the minning level. It would be expensive as hell, but at the high grades and high uranium prices it would likely still be very profitable.


    On Sep 11 11:06 AM legmaker wrote:

    > The flooding at Cigar Lake seems to benefit all uranium companies
    > as it will help to keep the price of uranium high. I like CCJ at
    > these prices, but DNN seems to be a much better play. Thank you for
    > your comments.
    Reply | Link to Comment
  •  
    Oct 08 11:55 PM
    Michael: when you wrote this article on 8/26 DNN was about $5.80 a share. Today, 10/8, DNN is at about $1.70. Do you have any comments at to why DNN has lost about 2/3's of it's value in six weeks?
    Thank you for your article. I have been watching DNN, and others, for an entry point.
    Reply | Link to Comment
  •  
    Oct 30 01:23 PM
    DNN has went down in price along with all the fear selling in the market. Uranium is still tight with alot under contract. The stock is a steal at this point and seems to have put in a bottom. Look for the stock to move upward. I currently hold call options on the stock.
    Reply | Link to Comment
  •  
    Oct 30 08:19 PM
    Look at Denison's stated grade (NI 43-101) and their production grades (substantially lower due to mining dilution). Do the math. The $45 floor will not help much. Profitability will kick in at a number twice that figure. Denison still has not released cash cost figures. Why is that?
    Reply | Link to Comment
  •  
    Nov 17 05:27 PM
    The current uranium market is difficult to say the least and you make some very fine points, but this company will do well in the long term as there will likely be tight supplies looking forward. Short term could be rocky, but there is more upside to the stock then downside. Thanks for your comments.


    On Oct 30 08:19 PM savvy_trader wrote:

    > Look at Denison's stated grade (NI 43-101) and their production grades
    > (substantially lower due to mining dilution). Do the math. The $45
    > floor will not help much. Profitability will kick in at a number
    > twice that figure. Denison still has not released cash cost figures.
    > Why is that?
    Reply | Link to Comment
  •  
    Nov 18 11:29 PM
    Uranium supply will be dominated by the companies with larger profit margins which are built on higher grades and/or lower operating costs. Small underground, low grade mines will have to compete against these. Historic production from these underground mines has been 4-7 tons/manshift, with labor rates running at approximately $600/manshift. Assume labor is equal to 50% of your production costs, throw in freight, royalties, and milling costs, add mill recoveries and you are at $75+/lb pretty quick. Throw in $5/lb for capital and a RoR of 15% and that will give you an idea of where uranium prices need to be for these deposits to be feasible. Western Australia has just lifted its ban on uranium mining and has massive supply potential. Look there.
    Reply | Link to Comment
  •  
    Jan 05 06:18 PM
    Why was DML on the Canadian market selling for $300 a share in 1999? Denison has stock on the AMEX(DNN)and the Toronto Exchange(DML).
    Reply | Link to Comment
More Comments on DNN ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Michael Filloon

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Long Ideas
Uranium
Alternative Energy
Coal