Denison Mines: A Play on Escalating Uranium Demand
by: Michael Filloon posted on: June 26, 2008
seekingalpha.com
After a long illustrious run, uranium producers have been hit hard as the spot price has decreased significantly. Many of them are selling quite cheap with respect to forward earnings as we are in a period of increased production.
Even though uranium prices have fallen significantly, it still sells at a large increase to prices of just five years ago. Expectations going forward are that countries with no exposure to nuclear will obtain the technical know-how, and those that have it will increase what they already have.
That being said, just China and India alone represents a large increase in the years ahead, but there are even hints that the United states is going to increase its position in the market. McCain recently stated he would like to add 100 nuclear reactors in the next ten years. This seems improbable but politicians set the bar high to get elected, and I believe both the democrats and republicans have interest in using low cost uranium to produce more power here at home. I have made many calls on this group of stocks on theupdown.com. I had recently taken positions off the table, but I believe those positions can be started in small amounts over the next few months.
With the exception of Cameco (CCJ) and USEC (USU), most of the uranium-based stocks are quite volatile and not for the faint of heart. With that in mind, I believe these stocks have pulled back enough to start taking positions because the risk/reward situation has gotten better.
Denison Mines Corp. (DNN) has been in the business for 50 years. They specialize in production, mining, milling and development of uranium. 2007 production of U3O8 was 683,000 lbs. Estimated production for 2008 is 2.1 million to 2.4 million lbs. By 2011, they estimate production will be between 3.6 to 6 million pounds due production of Zambian and Mongolian mines. The first quarter of 2007 saw revenues of $11.719 million. The first quarter of 2008 increased to $18.181 million.
There are two means of valuating the price of uranium. The first is the spot price and the other is the long term price. The spot price is generally derived from what utilities and investors will pay for the commodity at auction. The long term price is what is used when selling to those under contract.
As a general rule these two prices run very close to one another. For example, in January of 2006 the spot and long term price were both around $38 per pound. Not until April of 2007 was there a disconnection, as the spot price began to clime to almost $140 a pound while the long term price stayed around $90. Over the time frame, the spot price decreased to under $60 a pound while the long term price is still around the area it was in 2007. These numbers will begin to converge again as speculators begin to enter the market and utilities try to lock into lower prices while they still can.
Long term, there is a different story for uranium. There is a supply and demand issue developing as usage is increasing, while production is having trouble keeping up. Currently, nuclear generates 15% of the world's electricity. This is accomplished by 439 nuclear reactors. There are 34 under construction with more than 90 in planning.
The main reason for the demand is uranium's cost. The reactors are much more expensive to build, but the cost of nuclear is even cheaper than coal, and without the pollution. Using cost per Kwh in 2006, oil was $9.63, gas was $6.75, coal $2.37, and nuclear $1.72. The Uxc estimates that demand will outstrip all production (secondary and new production included) in 2014, but if the high end of demand is reached, demand will continue to outpace production at an increasing pace through 2020.
DNN has dropped with the price of uranium making for a compelling valuation. Looking at forward PE, it has lowered to 10.41. This is almost half of CCJ's forward valuation. Last quarter's miss makes for another great buying opportunity, especially when estimates have them making $0.74 next year in earnings.
Disclosure: None
Michael Filloon |
