Denison Mines: A Play on Escalating Uranium Demand

After a long illustrious run, uranium producers have been hit hard as the spot price has decreased significantly. Many of them are selling quite cheap with respect to forward earnings as we are in a period of increased production.

Even though uranium prices have fallen significantly, it still sells at a large increase to prices of just five years ago. Expectations going forward are that countries with no exposure to nuclear will obtain the technical know-how, and those that have it will increase what they already have.

That being said, just China and India alone represents a large increase in the years ahead, but there are even hints that the United states is going to increase its position in the market. McCain recently stated he would like to add 100 nuclear reactors in the next ten years. This seems improbable but politicians set the bar high to get elected, and I believe both the democrats and republicans have interest in using low cost uranium to produce more power here at home. I have made many calls on this group of stocks on theupdown.com. I had recently taken positions off the table, but I believe those positions can be started in small amounts over the next few months.

With the exception of Cameco (CCJ) and USEC (USU), most of the uranium-based stocks are quite volatile and not for the faint of heart. With that in mind, I believe these stocks have pulled back enough to start taking positions because the risk/reward situation has gotten better.

Denison Mines Corp. (DNN) has been in the business for 50 years. They specialize in production, mining, milling and development of uranium. 2007 production of U3O8 was 683,000 lbs. Estimated production for 2008 is 2.1 million to 2.4 million lbs. By 2011, they estimate production will be between 3.6 to 6 million pounds due production of Zambian and Mongolian mines. The first quarter of 2007 saw revenues of $11.719 million. The first quarter of 2008 increased to $18.181 million.

There are two means of valuating the price of uranium. The first is the spot price and the other is the long term price. The spot price is generally derived from what utilities and investors will pay for the commodity at auction. The long term price is what is used when selling to those under contract.

As a general rule these two prices run very close to one another. For example, in January of 2006 the spot and long term price were both around $38 per pound. Not until April of 2007 was there a disconnection, as the spot price began to clime to almost $140 a pound while the long term price stayed around $90. Over the time frame, the spot price decreased to under $60 a pound while the long term price is still around the area it was in 2007. These numbers will begin to converge again as speculators begin to enter the market and utilities try to lock into lower prices while they still can.

Long term, there is a different story for uranium. There is a supply and demand issue developing as usage is increasing, while production is having trouble keeping up. Currently, nuclear generates 15% of the world's electricity. This is accomplished by 439 nuclear reactors. There are 34 under construction with more than 90 in planning.

The main reason for the demand is uranium's cost. The reactors are much more expensive to build, but the cost of nuclear is even cheaper than coal, and without the pollution. Using cost per Kwh in 2006, oil was $9.63, gas was $6.75, coal $2.37, and nuclear $1.72. The Uxc estimates that demand will outstrip all production (secondary and new production included) in 2014, but if the high end of demand is reached, demand will continue to outpace production at an increasing pace through 2020.

DNN has dropped with the price of uranium making for a compelling valuation. Looking at forward PE, it has lowered to 10.41. This is almost half of CCJ's forward valuation. Last quarter's miss makes for another great buying opportunity, especially when estimates have them making $0.74 next year in earnings.

Disclosure: None

Comments

[john s.gordon]

uranium fission being cheap power? pls remember that part of today's cost will be paid by future generations of humans who have to put up with the piles of high-level waste that are to be created. wonder how they will feel about that. anybody for some more hydrogen fusion research?
> jack

[sliman]

Why not just buy uranium (u.to)?Then you do not have to worry about mining problems.

[ghr]

Does anyone know how Filloon gets to the cost per kwh? Is net of new plant construction?

[Igorisky]

In response to john s. gordon, the next generation will come up with breeder reactors that use us the spent uranium today we consider waste. We only utilize 4% of the energy in the fuel in today's reactor designs. Research on breeder reactors (stopped by Carter, revived by Reagan, stopped again by Clinton) will develop reactors that will not only consume the remaining 96% but also 'breed' more fuel. Less waste will be produced and we will be generating electricity for ever and ever, until infinity.

The Indians, Chinese and Russians are into this research now. The Americans? They are still mulling over the 3 mile island accident where no one had died and hardly disrupted lives of people living around the plant.

The fires in Northern California and heavy rains and floods in midwest today will, in a few years, be looked back at as a consequence of weather patterns being altered by global warming. Yet, we delay using nuclear technology which is the only answer to furutre global warming related disasters. Unfounded fears and stupidity is what will do in the human civilization.

[john s.gordon]

breeders are a wonderful idea as long as you can control terrorist access to radioactive assets. whatever happened to the missing material @ kerr-mcgee? why was karen silkwood murdered? don't blame carter for stopping reprocessing, he had to until certain questions are answered. was reprocessing in the UK accident free? how about reprocessing in japan?
> jack

[daniela]

I read discussion in Scientific American about reuse of nuclear waste. Not good idea at all. So far the best it to burry the waste.

[Clavis]

I am afraid that it is 'devil take the hindmost'.
Good article.

[Igorisky]

Had Carter let the breeder program go on up to the building and testing of a prototype, his questions would never get an answer. Proof of concept was needed and to address unanticipated problems as well as refine ideas. When this is all done, then the production proceeds. This is how new ideas get implemented. This is how the current nuclear plant designs got atarted and as you will concede, is working very well.

There are designs that addresses the terrorist and nuclear proliferation issues. We need cooperation beween all the world's nuclear scientists to address these issues. We cannot just go on and say it cannot be done. The alternative is Global Warming and the demise of the human civilization. Oh, people will not completely disappear from earth. It is probably safe to speculate that 5 % who are hardy and live in favorable locations will survive.

This should not really my concern for I will be around perhaps for only another 20 years.

[The BlackSwan]

Estimates of "cost per kwh" are, in all cases, highly subjective depending upon factors such as:

-legacy cost of plant construction
-discount rate assumptions
-fuel costs

To quote these inherently speculative estimates as precise facts demonstrates either a lack of understanding of the data being used as evidence or an intention to mislead.

The author cites numerous plants under construction. Recent reports by Goldman and UBS have made similar points. But let's do the math to put this in perspective: Nuclear reactors take 5 years to build, and that usually comes on top of several years of planning and approvals - even in dictatorial countries.

So perhaps all 39 plants "under construction" are completed in what, 5 years? That is roughly a 10 percent increase in global nuclear capacity. They may have higher capacities than some of the smaller reactors out there now, so perhaps more than 10 percent. But that is over a period of 5-10 years.

As other commenters have pointed out in the past, uranium mining production is expected (by the miners) to increase massively. Denison alone expect to add AT LEAST 3 million pounds of production by 2011. 3 million pounds is nearly 5% of current consumption, and nearly 10% of current mine production. Uranium One has similar growth in mind, and I'm sure Cameco and BHP aren't slouching either.

So we have negligible reactor growth over the next couple years, and possibly 10% in 5-10 years. Current reactors are increasing fuel burnup rates, which has increased their capacity factors and uranium consumption, so that could also drive uranium demand. However - we should also be aware that many in the current fleet are approaching the end of their useful lives, and could well come offline in 10 years.

There is indeed a chance that the Russians could engage in "extreme resource nationalism" as one poster puts it, and cut off its HEU shipments to the US. That would, for certain, impact uranium prices, as 20% of US electricity capacity would be at risk.

But let's look at this risk for what it is: highly binary. If the Russians continue to downblend HEU to power our PCs and hairdryers, the rest of the uranium market points to a surplus over the coming years.

The longer term market for uranium and nuclear power may well grow significantly, as uranium is the only non-fossil energy source that actually produces any real power today.

But let's also not play around with the truth about pollution: Nuclear is NOT carbon-free. This is an outright lie. All that uranium is mined, crushed, processed, enriched and shipped. Mining alone is a massively energy intensive process - and could become much more so if lower ore grades are used in the future. You mine a ton of rock to get a pound of uranium. That takes a lot of energy.

Uranium miners may well see large gains over the longer term, but near term they remain a speculative bet.

I should also comment on the writing style of this author. I am not a stickler for grammar, but I also question the level of introspection on the fundamental topic - nuclear power - from a writer who makes basic mistakes such as not capitalizing political party names and cannot make his verbs agree with his nouns.

[Wez]

Lol, not to mention he could of posted a pic with less shine. Don't forget that Hollywood is what really spooked Americans. 3 mile Island happened just after the release of China Syndrome. The movie plot was almost a color commentary on what almost happened at 3 mile Island.

The nuclear industry is clearly in revival. Stocks like CCJ will benefit.

[tankerman]

Even if everyone on the planet magically "got on board" with nuclear power, and approvals for plants were fast-tracked, we would still be severely capacity-constrained on a critical component of modern nuclear reactors: the containment vessels for the core of the reactor.

Japan Steel Works, which has a capacity to make four containment vessels per year, supplies everyone except the Russians:

bloomberg.com/apps/new...

[MichaelFilloon(legmaker)]

Thanks for all of the attention everyone, to be famous or infamous, all are good. The price per KWH is from Global Energy Decisions 6/07. And estimates on the time frame of nuclear reactor builds are four years not five, but you should check out the new Westinghouse design, they say it is faster. As for the waste from the reactor, I don't know what that has to do with the article, I did do one on ES which does specialize in radioactive waste. Keep talkin, I love to hear what you have to say, but it may be more thought provoking if you actually had some real knowledge from research within the field instead of your basic opinions. Thanks again everyone and God bless.

[fireball]

has anyone heard of silex? it seems a better play than usu. i owned shares of ccj about 10 months ago. i got out barely above breaking even. i have been looking at dnn. i am of the opinion that nuclear is coming in a big way whether the u.s. likes it or not. i do own silxf still. it has been a wild ride. i read that ge,ccj and some japanese company are heavily into silex. it is up pretty well for me now but at times i have said a few bad words over it.

[HardRockMiner]

We're running out of miners and have already felt the strain of the uranium mines competeing for our people in Nevada. I guess it's a good time in history to be a miner.

[liquid]

Fireball,
I think you are on the money with Silex. It is lightly traded on the ASX (SLX) and explodes anytime it trades with volume only to retreat again in the days following. I have held since 2000 and closely follow this one. GE purchased the rights to the technology and are bankrolling the startup so there is little cost to Silex only royalties to come!

[savvy_trader]

Denison reserves are relatively low grade. What are their production costs? These deposits cannot compete financially with the bigger player's higher grade deposits and will only be exploitable when the spot price rises above $100. As an analyst, you are not asking the right questions!