DNN - Denison Mines: Another Milestone Hit At Phoenix

Summary

• Denison Mines reported very high recovery rates from the ISR field test at Phoenix.
• This further de-risks the project and is an important step in the development process.
• Denison has a solid financial position and equity raising should be off the table.
• Management’s development strategy seems reasonable and long-term oriented.

Denison Mines ( DNN ) continues its efforts to de-risk its high grade Wheeler River project. The recently released positive news regarding the ISR field test at the Phoenix deposit are a major milestone for the company as it demonstrates the viability of the superior ISR mining method at the Athabasca basin. At the same time, the financial position of Denison is strong, potentially paving the way for a non-dilutive production path. While inflation will likely hit the initial capital requirements for Denison's projects, management seems to have a prudent strategy for their development. Overall, despite the risks that come with a developer stage miner, Denison seems like a good speculative bet on the uranium bull thesis.

Company overview

Denison Mines is a Canadian exploration and development uranium company with focus on the Athabasca basin. The company has ownership in a few assets, including the operating McLane Lake mill, where the majority stake is owned by Orano. The flagship asset of Denison is the Wheeler River project (95% interest), which has 109.4Mlbs of probable U ₃ O ₈ reserves.

The capital structure consists of 822.2M shares as of the end of Q3’22. There are 15.8M outstanding warrants with an exercise price of US$2.00, which expire in February 2023 and 39.2M warrants with an exercise price of US$2.25, which expire in March 2023. Based on the short time to expiration and the current market price being far away from the exercise price, I don’t expect any dilution to come from those warrants. However, there’s an active at-the-market equity program , which allows Denison to issue up to US$50M worth of new shares until October 2023.

The ownership structure is dominated by retail (70.9%), while institutions own 28.6% of the shares. Insider ownership is pretty low for an exploration/development company at just 0.5%, which is quite disappointing as it may suggest not enough "skin in the game".

Recent developments at the Wheeler River project

The Wheeler River project is by far the most promising asset of the company, therefore it is the main focus of management. The property consists of two main deposits – Phoenix and Gryphon. Denison plans to develop Phoenix first, using the ISR method, which is widely used by the uranium kingpin Kazatomprom (KAP:LSE).

While ISR mining is far superior in terms of costs compared to traditional operations, it has never been used at the Athabasca basin. So Denison has the challenging task to be a pioneer and if successful, will reap the benefits of single digit cash costs. In order to prove the viability of its operations plan, the company has been conducting a three-stage Feasibility Field Test . Recently, management reported a demonstrated recovery rate of 97%, far higher than the 85% that was used in the Pre-Feasibility study in 2018.

In addition, the second stage of the test was also successful as the leeching zone was restored to pH conditions within regulatory requirements. This further de-risks the project from a permitting standpoint as environment considerations in Canada are quite strong. The last stage – the management of the recovered solution will be conducted in H1’23.

Liquidity position and development strategy

Denison has a debt-free solid financial position, strengthened by 2.5Mlbs of U ₃ O ₈ . The company has also CAD$55M of cash and equivalents and some equity investments. The total liquidity position is over CAD$220M. At the same time, the initial capital required for Phoenix, according to the 2018 PFS is CAD$305.4M (95% basis). Obviously, this figure is before the recent inflation, so a considerable increase should be expected. But even a 50% hike in CAPEX, would put Denison’s liquidity position at 50% of the requirement and the debt-free profile of the company, combined with Phoenix’s robust economics could pave the way for a loan financing of the remaining portion.

At the same time, in a recent interview, the CEO of Denison – David Cates has laid out a staged development strategy, where the relatively low initial CAPEX and high margin Phoenix is put into production first and the subsequent cash flows are used for the development of the higher-CAPEX Gryphon and other projects. I like this approach as it doesn’t push everything at once and should keep dilution at a minimum.

Valuation discussion

The current EV of Denison, while taking into account the cash and equivalents as well as the physical uranium holdings is around CAD$1B. At the same time, under the 2018 PFS’ base case, the post-tax estimated NPV of Wheeler river at 95% basis would be CAD$798M. However, the base case uses uranium prices for Phoenix between US$29.5/lbs and US$45.1/lbs, which is below the current market price. Under the high case of US$65/lbs, the indicated NPV of Wheeler River jumps to nearly CAD$1.5B.

While Denison has smaller stakes in other projects, they’re quite insignificant compared to Wheeler River, so I don’t expect much value to come from them. On the other hand, maybe Denison could sell a smaller project in order to further boost its liquidity position for the development of Phoenix. I also consider the established partnership with Orano a positive, as Denison may eventually become a target of the French uranium giant.

Regarding near-term upside triggers, besides a potential uptick in uranium prices, the release of a Feasibility Study, which is expected towards the end of H1’23 could trigger a move to the upside. However, depending on the increase in expected costs, the initial market reaction may not be positive. Progress on permitting and the completion of the FFT test are also potential upside triggers.

Risks

CAPEX blowout risk

As discussed above, a significant increase in initial capital outlay as well as operation costs at Phoenix could be expected. While there’s little Denison could do to mitigate this risk a potential increase in uranium prices, due to expected market deficit should offset that. Also, the low cost nature of the ISR mining method will maintain the far superior cost profile of Phoenix, compared to conventional mining projects, regardless of inflation.

Operational risk

The ISR mining method has never been used at the Athabasca basin and there’s an increased operational risk of being a pioneer in the application of a new technology. So far, Denison is doing a great job at reducing this risk through the Feasibility Field Test. The FFT's completion should give the market further confidence of the viability of the planned operations.

Permitting risk

Canada is famous for its strict environmental regulations, which could make the permitting process lengthy. That being said, the government has signaled willingness to fast-track energy and mining projects that are deemed of strategic importance. While uranium was not explicitly mentioned, I think it should classify as strategically important, given the expected supply deficit and the huge potential of nuclear energy for decarbonization.

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