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Denison Mines (NYSEMKT: DNN) is working to build a new uranium mine in Canada. For investors interested in the nuclear fuel, it's an interesting stock to look at because of the material upside potential if construction plans play out as projected and uranium prices rise. But does that make it a stock worth buying? Only if you clearly understand the risks before putting your hard-saved capital into the shares. Here are some key facts you need to know before you invest here.
The good stuff
Denison's big asset is the Wheeler River project, which encompasses two potential uranium mines, Phoenix and Gryphon. In total, the company estimates that there are around 100 million pounds of uranium at the site. The two mines, meanwhile, are projected to have low operating costs. Phoenix's costs are expected to be as low as $3.33 per pound, while Gryphon is projected to have costs of around $11.70 per pound. Both are notably below the current uranium spot price of around $28 per pound.
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To help it get from the drawing board to an operating mine, meanwhile, Denison has a 22.5% interest in the McClean Lake Uranium mill. So, unlike many other upstart miners, Denison actually generates some revenue to help offset the costs of developing Wheeler River. Through the first nine months of 2018, McClean brought in roughly $8.6 million.
Right now, Denison is projecting internal rates of return for the Wheeler project of between 38% and 67%, depending on future uranium prices. As for the balance sheet, it's pretty clean since Denison has no long-term debt weighing down its balance sheet. So far, Denison sounds like an interesting investment opportunity. But there's much more to understand before you buy Denison stock.
The bad news
The biggest issue to consider with Denison Mines is time. Although the Wheeler River project sounds great, construction on the first of the two mines, Phoenix, isn't projected to start until 2021. It won't start producing uranium until 2024. Construction on Gryphon isn't projected to start until 2026, with first production in 2030. Being that it's 2019, there is a long time before these assets will contribute to cash flow. And that's if everything plays out as planned, which isn't a lock when dealing with the ground-up construction of a new mine.
So, even if everything works out as hoped, Denison has years worth of expenses ahead of it. It will need to raise substantial capital to get these mines built. And, with a 90% ownership interest in the Wheeler Project, it's on the hook for most of the costs. The stake in the operating McClean Lake uranium mill is expected to help with that, but the company's operating expenses in the first nine months of 2018 were roughly $8.8 million compared to revenue of $8.6 million. The expense number's not exactly a clean one because you have to take into consideration things like depreciation, which is a non-cash expense, when you consider the benefit of the asset. But the bigger picture is that McClean Lake may help offset some mine development costs, but not a huge amount.