Denison Mines stock is a buy on potential uranium price rise (NYSE:DNN)
Denison Mines (DNN) is a $1.1 billion uranium development company with a world-class deposit expected to come into production in 2024.
I have already highlighted the bullish case of uranium. In a nutshell, global supply is significantly lower than global demand. The Sprott Physical Uranium Trust (OTCPK:SRUUF) has stockpiled 44 million pounds of uranium in recent months. This removed supply from a market that consumes around £190m a year with a supply shortfall of £30m a year. By the time Denison’s flagship project goes into production, I expect the price of uranium to be well above the $45 at which it is currently trading.
In the past month, two new catalysts have emerged that could have serious implications for the price of uranium and, therefore, for DNN’s stock.
Political unrest in Kazakhstan
Recently, there have been serious political unrest in Kazakhstan. Dozens of people have been killed in clashes between anti-government protesters and security forces. What started as civil unrest soon turned into a major security situation where the internet was even shut down for five days. Kazakhstan asked Russia to send troops to quell the uprising.
In recent days, it seems that the uprising has died down. What could have escalated into a real coup attempt was quickly extinguished when opposition forces saw that Russia was aligned and willing to protect the current rulers.
This severe civil disruption could have major implications for uranium supply. Kazakhstan currently supplies 40% of the world’s uranium and the state-owned Kazatomprom is the largest uranium company in the world. If the political unrest in Kazakhstan escalates in the coming months, the supply of uranium could be disrupted, which would be bullish for the price of uranium.
Additionally, the political situation in Kazakhstan highlights the importance of investing in assets in stable jurisdictions. Most of Denison’s significant properties are in Canada. Any political conflict in Kazakhstan will likely run into investors discounting uranium assets in volatile regions while adding a premium to North American assets.
Nuclear power favored by Senator Manchin
Sentiment towards nuclear power has even improved in the United States in recent weeks.
Sen. Joe Manchin is currently negotiating to include a nuclear tax credit in Biden’s currently deadlocked Build Back legislation.
Maintaining our fleet and preventing shutdowns of existing nuclear power plants are critical to meeting emissions reduction goals and ensuring a reliable grid,” Manchin told Biden in a letter last year.
“I’m big on nuclear,” Manchin told reporters on Capitol Hill last week.
The bearish argument for nuclear was that nuclear facilities would be phased out over the next few decades. However, the political environment has been the most favorable to nuclear energy for several years. A 10- or 12-year nuclear power tax credit would almost guarantee that utility companies will not abandon nuclear power in the United States.
Denison’s principal asset is a 95% interest in the Wheeler River project. It is the largest undeveloped asset in the eastern Athabasca Basin. This project hosts two world-class deposits. The Phoenix deposit is estimated to have an overall cost of only $8.90 per pound of uranium. Operating costs are expected to be $3.33 per pound of uranium. With the spot price of uranium at $45.50 and many long-term contracts being negotiated north of $50, one can see the immense profit potential of a low-cost mine. As a bonus, the project is in a stable jurisdiction. The Gryphon deposit is expected to have all-in costs of $22.82 per pound and mining costs of $11.70 per pound. The two deposits combined represent proven and probable reserves of 109 million pounds of uranium with a mine life of 14 years.
The project is currently in the pre-feasibility stage and production is expected to begin in 2024. Of course, shareholders can expect some dilution, as the company will have to spend $325 million to bring the mine into production.
The base case for this project yields a net present value of $1.31 billion if uranium prices hover around $40 per pound over the life of mine. Of course, I expect the price of uranium to be much higher and maybe even multiples of that figure and my NPV is well over $3 billion.
Denison has interests in 30 other projects in various stages of development. The company relies on its technical team and takes significant stakes in surrounding projects. The company also owns 2.5 million pounds of uranium currently valued at $112 million. Additionally, the company has an extensive exploration portfolio of 250,000 hectares.
The company is currently valued at $1.1 billion. The stock goes up and down with the price of uranium. For investors bullish on the price of uranium, you can get a 3x upside by investing in a top development company like Denison.
The bear case
In the long run, the bear case is that the price of uranium stumbles to $30 a pound and Denison’s projects never develop. Of course, the major risk with uranium is another nuclear accident that would shut down nuclear reactors.
In the short term, DNN is a favorite of the day trading crowd. As a highly volatile stock that can move 10% in a day, traders love to speculate with DNN stocks. Unfortunately, this means that stocks are often sold off when the overall market falters. I have noticed that DNN stocks often struggle if other speculative stocks are sold in totally unrelated sectors. It is the curse of being a speculative vehicle. However, this is short-term noise that should be ignored by long-term investors with a multi-year horizon.
If you’re optimistic about the long-term price of uranium, Denison is a great company to give you some upside torque. The company has one of the major assets in the entire uranium industry. With one of the cheapest mines in the world, one can only salivate at the potential profits if uranium rises above $100 a pound in the coming years.