Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

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Canada Research | Page 38 of 87Uranium2011) and $7.1 mln in Zambia, including 15,000 m drilling. A total of $3.5 mln is alsoslated for permitting, development testing and other work at McClean North andMidwest. These aggressive plans should facilitate healthy news flow throughout the year.Strong Partners. Korea’s largest electrical utility, Kepco (~$14 bln market cap), owns15.08% of Denison’s outstanding shares following a C$95 mln private placement in2009. Given the annual uranium demand of Korea’s current nuclear fleet (reported at 10Mlbs in 2012 by the World Nuclear Association (WNA)) and planned aggressive buildout,we believe Kepco would be a highly supportive partner moving forward. Kepco hastop-up rights on future equity issues and controls two seats on Denison’s Board. As partof the 2009 agreement, Kepco was entitled to >350 klbs/year from 2010 – 2015; this offtakearrangement has been transferred to Energy Fuels.Denison Still has Revenues. Denison’s other businesses – its environmental services armand Uranium Participation Corp. management – should continue to provide the companywith steady cash flows into the future (we model US$18 mln/year revenues in perpetuity).The company should realize some revenue from toll milling charges associated withprocessing Cigar Lake ore at JEB (~$4 mln – $6 mln/year at full production rates, but wenote these cash flows are unlikely to be significant until 2014E).Potential ConcernsFinancing Risk. Denison has a strong balance sheet, with 1Q12A cash and equivalents ofUS$43.5 mln, working capital of US$87.8 mln, and no debt. With $19.3 mln budgeted forexploration and development in 2012E (and likely similar levels into 2013E, with somedevelopment spending in Mongolia and Canada), we model a future funding shortfallbeginning in 4Q13E. Although we are optimistic on the outlook of the uranium space,there is a risk that Denison, as a junior, could face challenges issuing shares at attractiveprice levels, if current risk-aversion in the broader market is protracted.A $35 mln revolving credit facility expired June 29, 2012; to be conservative, we assumeDenison was unable to extend the term of this facility (clarity will be provided in 2Q12financial results).Limited Visibility at Other Projects. Details on costs and timing for Denison’s moreadvanced Canadian projects – specifically at McClean and Midwest – remain somewhatelusive. At McClean North, management has guided for a potential 2016E start-up and 4Mlbs/year (Denison’s share
Uranium Canada Research | Page 39 of 87resolves allegations of voting fraud and settles in. Our DCF yields C$76 mln for Denison’sMongolian assets.Potential CatalystsPotential milestones for the company include:• An exploration update including assays from the summer drill program at WheelerRiver by Jul-31-12;• Details on pre-feasibility study results, as well as a production decision at theMcClean North underground by year-end;• Results from the environmental review at Midwest by year-end.The Quarter AheadDML has guided for 2Q12E production of 277 klbs U3O8 production from alternate feedsources at White Mesa, Utah and sales of 316 klbs U3O8. Now that the sale of all USproducing assets is complete and the company has reverted back to anexploration/development play, we view 2Q12E results as largely immaterial.Valuation and FinancialsExhibit 53: RJL NAV Summary for Denison MinesUnfunded NAV ValuationFinancial C$mln C$/fd.sh. %Working Capital (1Q12A)Additional CapitalLT LiabilitiesSG&AProjectsMcClean Lake Mill (replacement)Wheeler River (DCF; 8%)Cdn Expl Assets ($/lb, cost)Gurvan Saihan, Mongolia (DCF; 8%)Mutanga, Zambia (DCF; 8%)Environmental, UPC Mgmt (NPV; 8%)$87.8 $0.22 12%$12.2 $0.03 2%($1.1) $0.00 0%($52.7) -$0.13 -7%$46.3 $0.12 6%$213.8 $0.55 28%$230.4 $0.59 30%$106.0 $0.27 14%$75.9 $0.19 10%$55.6 $0.14 7%$34.3 $0.09 4%$715.9 $1.83 94%Net Asset Value: $762.1 $1.95 100%Fully Diluted Sh. (mln) 391.3Source: Raymond James Ltd.We have a Market Perform rating and $1.80 target on Denison. Our target is based on a0.9x P/NAV applied to the project component of our C$1.95 NAVPS (8% discount; seeExhibit 53). Given our large projected future funding shortfall (C$505 mln), our NAV iscalculated on an unfunded basis. Our P/NAV multiple reflects the historical tradingranges of 0.23x to 1.26x for our Raymond James Ltd. explorer/developer juniors, andour one-year, pre-Fukushima average Denison multiple of 1.2x. We also adjust ourmultiple for exploration upside, high takeout potential, and the current challengingfinancing environment for juniors.Denison currently trades at 0.68x P/NAV (vs. Ur-Energy at 0.33x), as well as US$1.72/lbfor the company’s 269 Mlbs in total resources vs. our global explorer/developer peers atUS$0.70/lb.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
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