INVESTMENT COMMENTARY — Denison appears ready to bounce back

With its capital restructuring complete and uranium prices showing strength, Denison Mines (DEN-T) has the opportunity to reclaim a place among profitable producers of yellow cake.

An analysis by Graeme Currie and Andrew Muir of Canaccord Capital concludes that Denison’s share price could rebound to 80 cents-$1 from its present 32 cents if uranium prices continue to increase and if the company’s liabilities remain stable.

Denison owns interests in two uranium projects in northern Saskatchewan: McClean Lake (22.5%) and Midwest Lake (19.5%). Cogema Resources operates both mines and has scheduled initial production from McClean Lake for mid-1997.

McClean has reserves of 812,000 tonnes grading 2.8% U3O8, or 50 million lb.

Annual production is projected at 18 million lb. U3O8, and operating costs are expected to be around US$5 per lb.

Reserves at Midwest are around 360,000 tonnes grading 4.5%, or 36 million lb.

and operating costs are estimated at US$4.50 per lb. Midwest, unlike McClean, is strictly an underground deposit; current plans call for it to be mined by water-jet boring, which will allow the ore to be brought to surface without human contact.

Both deposits are believed to have good exploration potential, and some other mineralized intersections have been encountered at McClean Lake. The company’s other uranium exploration interests in Saskatchewan, notably the Wheeler project, provide another potential upside.

Denison also has oil and gas interests in a Greek offshore field, and its share of production in 1995 was 2.2 million barrels of oil, 33,000 tonnes of sulphur and 106 million cu. ft. of natural gas.

The favorable outlook for uranium prices could be Denison’s best friend in the immediate future. Spot prices for U3O8 have been creeping up steadily over the past two years as consumption exceeded production; they recently touched US$16.50 per lb., their highest point since 1987. The gradual drawdown of uranium from weapons stocks has also strengthened the price.

Since power utilities normally want to secure their uranium supply for long periods, most producers sign long-term contracts to provide uranium to the consumer, usually at a considerable premium to the spot price. Currie and Muir estimate the current long-term prices to be US$23.50-US$25.

The company has a market capitalization of $117 million, which translates to $5.43 per lb. of reserves or $77 per lb. of production. Currie and Muir compare these figures to those of established uranium producer Cameco, which has a market capitalization of $3.85 billion at its late April price of $73 per share, representing $10.15 per lb. of reserves or $191 per lb. of production. The analysts argue that Cameco’s price, and its historical price-to-earnings ratio of 10, implies earnings of about $7.50 per share in the year 2000. Cameco could earn that much if the uranium price reached $30 per lb., which would bring Denison’s earnings to 8 cents per share and would place the company’s shares at 80 cents.

The chief risk the analysts identify is the ongoing cleanup of four tailings sites at Denison’s former mines in the Elliot Lake area of northern Ontario.

In March 1995, the company submitted an environmental impact statement on its cleanup plan to a panel established under the Environmental Assessment and Review Office. The panel finished its public hearings in January 1996 and is expected to release its report in mid-June.

The Atomic Energy Control Board, which regulates uranium mining, will make a final determination on Denison’s reclamation plans when the panel reports its findings.

The company has reserved $35 million for future decommissioning costs and has deposited another $10 million in a trust fund for reclamation. Should the review panel determine that Denison’s liability for the cleanup is greater than the $45 million now earmarked for the work, the value of the stock would be diminished.

The decommissioning of the Denison mine is expected to be complete in 1996, leaving only the Stanrock mine to be decommissioned.