Denison Nets $95M In Deal With Korean Utility

In a tough economy, Denison Mines (DML-T, DNN-X) is choosing the path of prudence, and the market is nodding its approval.

The uranium miner, which has drastically cut production due to slumping uranium prices, has made a deal with Korea Electric Power Corp. (KEPCO) that will see South Korea’s largest utility buy 19.9% of Denison and 20% of its annual production.

While the price details of the offtake agreement with KEPCO were not disclosed, Andre Desautels, a spokesperson for Denison, said it would be higher than current spot prices, making production economic again.

“It doesn’t make sense for anyone to produce at the current spot price,” Desautels says.

In all, the deal will net Denison roughly $95 million — enough cash to pay down its revolving line of credit and keep its debt-to-earnings ratio within the parameters of its debt covenants. Company auditors had warned that the ratio could grow to a level that would break the covenant by the fourth quarter of this year.

The plan now will be to pay down the line of credit and then draw from it as necessary for project development.

Under the offtake agreement, Denison will sell at least 510,000 to 690,000 lbs. of uranium oxide a year to KEPCO between 2010 and 2015.

In Toronto on the news, Denison shares finished 16% higher at $1.51 on 8.3 million shares traded.

The uptick continues a positive trend started on April 2, when Denison announced it had found a new mineralized zone at its Wheeler project, in northern Saskatchewan.

That news broke the downward pressure its stock had felt since last June, when Denison traded around $8 per share. Its shares had traded as low as 83¢ as recently as April 1.

Shares had been depressed largely by word a month ago that the company was suspending some operations due to weak uranium prices, and that it was in danger of breaching covenants.

In all, KEPCO will buy 58 million Denison shares through a private placement for $75.4 million and then turn around and sell roughly 15 million shares to companies connected with Lukas Lundin for roughly $19.5 million.

That works out to a price of $1.30 per share — a 15% premium to the 30-day moving average of the stock.

Lundin is the chairman of Denison, as well as of Lundin Mining (LUN-T, LUNMF-O), Canadian Gold Hunter (CGH-T, CGHLF-O), Pearl Exploration and Production (PXX-T, PXXFF-O), Red Back Mining (RBI-T, RBIFF-O), Tanganyika Oil, and Vostok Nafta Investment.

KEPCO’s move comes at a time when South Korea’s Asian counterparts, namely China and Japan, are aggressively securing natural resources abroad.

The deal allows KEPCO to appoint two directors to Denison’s board and gives it the right of first offer to acquire up to 20% of any assets Denison acquires with a partner or sells.

After a surge that pushed prices to more than US$130 per lb. in the summer of 2007, the spot price of uranium oxide has been on the decline, and was recently in the US$40-per-lb. range.