Denison Mines - Riding Up The Lassonde Curve
The Lassonde Curve (named after Pierre Lassonde, the legendary commodities investor / founder of Franco-Nevada) describes the different life stages of a mining company. The first stage (concept, exploration and discovery) is when the company buys prospecting rights and starts drilling in search of mineral deposits. Drill results often lead to sharp swings in the stock price which attracts short-term traders and speculators. Once the discovery is made and the initial excitement peaks, the stock price can languish as the company starts the long and tedious work of de-risking the resource and bringing it to production. During this next stage (feasibility and development) the company generates a feasibility study (FS) to further crystallize the economics of the resource, obtains the necessary regulatory approvals and arranges financing. Some of the best returns in mining stocks come during the conclusion of this phase as the mining company successfully transitions from development to production.
Last month, Denison Mines made a big jump up the Lassonde Curve by announcing that it had successfully recovered uranium from its ISR (in-situ recovery) feasibility field test (FTT).
Denison (TSX: DML, NYSE: DNN) is a uranium development company based in the Athabasca Basin region of Northern Saskatchewan. Their flagship asset is the Wheeler River project in which the company has 95% effective interest. There are two main reasons I’m excited about Denison:
Along with NexGen’s Arrow Project, Wheeler River’s Phoenix and Gryphon deposits represent the only other significant uranium projects in North America with 10 years of production at or above 6mm lbs/ year
De-risking of the ISR method is a major milestone as this method has never been used for any Athabasca Basin uranium deposit and would result in attractive economics. The final phases of the FTT should be completed in the first half of 2023 and will ensure the full success of the ISR trials including permeability, leachability and application of containment parameters and allow the company to complete a feasibility study (FS)
Phoenix and Gryphon are some of the lowest-cost uranium mining deposits in the world. Phoenix is designed as a low-cost ISR recovery operation and expected to start production in 2024-2025 while Gryphon will be a conventional mine expected to start production in 2030. Based on the 2018 pre-feasibility study (PFS) Phoenix has all-in costs of US$8.90/ lb while Gryphon has all-in costs of US$22.82/lb. The FS to be released in the first half of next year will likely revise these figures higher, but they are still incredibly attractive relative to current spot price (US$50/lb) as well as where I think long-term prices are going (US$90+).
I’ve explained before why the period after 2025 is so important for the uranium market. Based on the current schedule of mines coming online the uranium market can reach equilibrium in the 2025-2027 period (though this is looking less likely given reactor life extensions, Japanese restarts, the switch from under to overfeeding and potential financial demand). But this equilibrium will revert to a deep deficit in the latter half of the decade due to the numerous proposed nuclear reactors coming online and legacy mines like Cigar Lake reaching the end of their life. Deposits like Arrow and Phoenix will be critical in ensuring sufficient supplies of uranium for this decade and the next, and will therefore be coveted by both financial and strategic investors. The bi-furcation of the uranium market has made North American uranium producers even more valuable as utilities look to cut ties with Russian-supplied enriched uranium.
In addition to the Wheeler River project, the company has a number of other assets that are quite valuable:
22.5% ownership of McLean Lake Mill - an operating, licensed, processing facility that is currently toll milling all of the production from Cigar Lake mine (50% owned by Cameco and licensed to produce until 2031). With 9mm lbs of excess capacity, this mill is an extremely valuable and strategic asset for milling any future uranium production in the region
“Development Portfolio”
67% ownership of Waterbury Lake - 6 years mine life with 12.8mm lbs indicated resource amenable to ISR operation
Smaller projects: minority interests in McLean Lake (22.5%) with 17.8mm lbs indicated resource and Midwest Property (25.2%) with 50.7mm lbs indicated resource
While management is focused on developing Phoenix at the moment, the development portfolio assets could become increasingly important in the second half of this decade as the uranium bull thesis progresses. De-risking these assets and giving them fair value in the NAV calculation would lead to analysts significantly increasing their estimates for fair value of the stock. In terms of timing, management has stated that they are focused on getting Phoenix up and running first, and then using the cash flow from those operations to fund Gryphon and then Waterbury. Doing this ensures that capex/financing/dilution risk is minimized and that management stays focused as opposed to trying to do too much at the same time.
At a 10% discount rate and US$70 uranium price assumption, the Wheeler River project post-tax NAV is roughly C$2.2 per share while Waterbury would add another C$0.22. At US$80 uranium price assumption, those figures would be C$2.6 and C$0.28 respectively. The company also has 2.5mm lbs of U3O8 in inventory which would be valued at roughly C$160mm (at current spot price of US$50 / lb) as well as C$55mm of cash. Offsetting that is roughly C$200mm of debt financing that will have to be incurred for the balance of the capex requirements (capex requirement for Phoenix was earmarked at $322mm in the PFS and will likely be raised in the FS). At a 7-8% discount rate, the 22.5% interest in the McClean Lake Mill should be an additional C$0.30 - 0.40 / share.
Based on these assumptions and assigning zero value to the company’s other assets, the stock should have 70% to 100% upside from today’s stock price of C$1.60. If we assume a higher uranium price (Cameco’s CEO recently stated that a US$90+ uranium price is likely needed to balance the market over the long-term) and / or apply a premium to NAV, the upside could be significantly higher.
Conclusion
Denison is an extremely important company for the uranium market given its ownership of the Wheeler River project, potential ISR mining breakthrough and other strategic assets. I believe 2023 will be a news/catalyst-rich year for the company as the final phases of the FTT are completed and a new FS is published which will significantly de-risk the NAV.
Investors are currently valuing the company at a large discount to NAV and not giving credit to the full portfolio of assets as well as the company’s strong balance sheet. But as the company continues pushing up the Lassonde Curve towards being a producer, a significant re-rating of the stock higher is likely. As one of a handful of major North American uranium projects, the company will be a must-own in resource investor portfolios as the uranium bull market matures.