Cigar Lake production shines spotlight on Denison Mines

The start of ore production at Cameco Corp.’s (TSX: CCO; NYSE: CCJ) Cigar Lake uranium mine is good news for Denison Mines (TSX: DML; NYSE-MKT: DNN), which owns 22.5% of the McClean Lake mill where all of Cigar Lake’s ore will be processed into uranium concentrate.

The McClean Lake mill, about 70 km northeast of the Cigar Lake mine, is expected to start processing ore from the mine by the end of the second quarter of 2014 and is forecast to produce between 2 million and 3 million pounds of uranium concentrate in 2014 and ramp up to its full production rate of 18 million pounds by 2018.

In addition to Denison’s stake in the mill — one of the largest uranium-processing facilities in the world — Areva Resources owns 70% and is the operator, and OURD Canada holds the remaining 7.5%. 

Colin Healey of Haywood Securities says the commencement of ore production at Cigar Lake “increases visibility on near-term cash flow potential” for Denison, and points out that the value of Denison’s stake in the mill “has grown significantly over the past few years as the Cigar Lake joint-venture has carried the majority of the cost of upgrading the mill’s systems and capacity to accommodate Cigar Lake ore.”

Denison’s stake in the mill is also “highly strategic” in Healey’s view, making the company a “highly attractive take-out target, particularly to Cameco,” which has no stake in the mill, but owns 50.025% of Cigar Lake and is the mine’s operator.

In addition, the Toronto-based uranium exploration and development company holds a 60% stake in the high-grade Wheeler River uranium project, which would be attractive to Cameco because it already owns 30% of the project, the mining analyst reasons.

Denison’s stake in the Waterbury Lake deposit is also likely to be attractive to Cameco, Healey argues, as Waterbury “appears to potentially be an extension of the Roughrider deposit,” which Rio Tinto acquired from Hathor Exploration in 2012.

This year Denison has budgeted $15 million for a 60,000-metre drill program in the Athabasca basin, marking one of its largest exploration programs in several years.  

The drill program is spread over 13 uranium properties, but nearly half of it will focus on Wheeler River, 35 km southwest of Cameco’s producing McArthur River mine.  

Denison plans to drill 27,000 metres and undertake geophysical surveys on Wheeler River. Targets include high-grade mineralization extensions at the Phoenix deposit and followup drilling on the 489 zone, Phoenix North and the K-zone. The Wheeler River exploration program will cost about US$8 million, of which Denison’s share is US$4.8 million.

Denison will spread the remainder of its drill power across a number of other properties, including 5,000 metres at Bell Lake; 4,000 metres at Moore Lake; 3,550 metres at Crawford Lake; 3,050 metres at Bachman Lake; 2,700 metres at Waterbury Lake; 2,400 metres at Park Creek; 2,100 metres at Hatchet Lake; 4,000 metres at Wolly; and 2,700 metres at McClean Lake.  

Outside Canada, Denison has earmarked US$1.8 million for geological mapping and geochemical and trenching programs at its 100%-owned conventional heap-leach Mutanga project in Zambia, and US$1 million on restructuring its Gurvan Saihan joint venture in Mongolia to meet the requirements of the country’s nuclear energy law. Denison owns an 85% stake in the in-situ recovery joint-venture project.

Denison also owns an 80% interest in the Dome project in Namibia and 100% of the conventional uranium-copper-silver Falea deposit in Mali, which it picked up through its acquisition earlier this year of Rockgate Capital Corp.