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The Thesis

Denison Mines (NYSEMKT:DNN) is a uranium exploration and development company with a 22.5% interest in the McClean Lake uranium processing facility. Recent developments indicate a delay of cash flow from the McClean processing facility which had been anticipated to start production late in 2013.

This article explores the impact of this delay on Denison Mines.

The Company

Denison mines has a market capitalization of $544M at the time of writing and shares are trading for $1.17. The stated management objective of the company reads as follows:

To build the strongest portfolio of strategic uranium deposits in the Athabasca Basin through resource development and strategic acquisitions.

Denison Mines already owns interests in an outstanding portfolio of uranium deposits in the Canadian Athabasca basin, and the focus is firmly kept on advancing these projects. The company has numerous properties in the region at different levels of development, many of them in joint venture with larger uranium miners such as Cameco (NYSE:CCJ) or Areva (OTCPK:ARVCF). Through these cooperations, Denison also has access to the so-called SABRE mining technology which has been developed specifically for the deep deposits found in this area.

(click to enlarge)

(Surface Access Borehole Resource Extraction - SABRE)

The impressive land position in the Athabasca basin has been achieved through a number of deals that saw Denison take over various smaller exploration outfits in the area. The company has sold all its US-based interests to Energy Fuels (EFRFF.PK) and we would not be surprised if the company will follow through with divesting further non-Canadian assets in due time.

The most promising exploration property to date is the 60% owned Wheeler River project which includes the Phoenix deposit. This deposit currently ranks as the fifth largest resource in the Athabasca basin and at over 16% U3O8 has the highest grades. With 12,000m of drilling planned this year's summer exploration campaign had a clear focus on advancing the Phoenix project. Drill results have started to flow from this campaign and as we are writing this article, the best intersection at this project (and possibly in the wider region) so far is being reported at 12m of 43.4% U3O8. Gold miners would call this a bonanza grade.

This brings us to the McClean Lake. Denison's interest here is only 22.5%, and Areva is the operator. There are various past production mines on the property, and a PFS is under way for the McClean North deposit. The near-term focus here, however, is the uranium processing facility which is the only mill in the Athabasca Basin that can process the high-grade Cigar Lake ores without down blending. Cigar Lake is a large new nearby mine currently being commissioned by Cameco in JV with Areva and two Japanese partners. The McClean Lake facility has a toll milling agreement for the ore mined at Cigar Lake and is being expanded to a capacity of 12M lbs per year for this purpose. First production at Cigar Lake and the McClean plant was originally expected in the fourth quarter this year.

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(McClean Lake. Photo taken from company website)

Delays
A few days ago Cameco announced that unexpected water leakage from the subterranean ROM chamber had necessitated some additional remediation work at the underground mine leading to a delay for first production at the Cigar Lake mine. For Cameco this problem comes on the tails of expected capital expenditure overruns of 15% - 25% announced in the last quarterly report.

In addition, Areva advised that further modifications will be required at the McClean plant and that the mill is expected to begin processing Cigar Lake ore by the end of the second quarter of 2014. More specifically, Areva stated that it has been determined that a potential for the formation of increased hydrogen formation exists in the leaching circuit. After consideration of various options, it has been decided to install a robust ventilation and purging system to solve this issue.

Ore from Cigar Lake will be stockpiled at McClean Lake and processed as soon the upgraded plant comes online. The plant design allows for some overcapacity and this will be used in order to catch up with mine output.

So far Denison has not commented on these developments.

In Denison's 2012 annual report the following is stated with regards to ongoing costs for the McClean facility:

The Cigar Lake joint venture continues to pay nearly all of the stand-by expenses under the terms of a toll milling agreement. […] Denison's share of operating and capital expenditures in 2013 is estimated at CAD$1,800,000. Denison expenditures are expected to be offset by revenue projected at CAD$1,500,000 from toll milling revenues and the proceeds from the sale of approximately 25,000 pounds U3O8 recovered from McClean Lake ores processed as part of the Cigar Lake commissioning efforts.

In effect, the delay will cost Denison $1.5M (Canadian) in lost revenues for the present year. In addition, the company will have to fund its share of capital expenses for the first two quarters in 2014. To the best of our knowledge, these costs are not quantified in the company's published reports. The cost of the additional plant modifications flagged by Areva have not been specified, except that these costs are not impacting the 2013 budget.

So far this year, Denison has burnt $11.3M in the first quarter and $10.45M in the second. At mid-year the company had $31.4M in cash and cash equivalents and the same amount in working capital. The company has just raised $14.5M in May, issuing 11.5M new shares at $1.30, bringing the total of outstanding shares to 461.5M.

Cash flow from toll milling cannot be expected to finance the full exploration budget for Denison at this stage, but will contribute substantially. Looking at the current cash position, the company has enough funds to last for close to three more quarters. It can be assumed that the delay in receiving revenues from the McClean facility will accelerate the timing for the next capital raise of the company.

In Conclusion

Overall, Denison is a highly attractive uranium investment vehicle. The commanding presence in the Athabasca basin ensures exposure to some of the most attractive known uranium mining projects.

Denison Mines is still an exploration stage company without substantial cash flow at its disposal. The company will most likely have to return to the capital markets in order to ensure future funding. All the usual risks for junior mining companies apply.

The delay in bringing the McClean Lake plant back into operation is a bump on the road for Denison Mines. However, the effects should not impact the performance of the company materially. It might, however, accelerate timing for another capital raise in late 2013 or early 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Denison Mines: Close, But No Cigar (Yet)