They expect to sell 1.8 to 1.9 million lbs of U and 3 to 4 million lbs of V. Assuming a low ball price of $75lb for U and $12lb for V, we get the following revenue estimates (keep in mind these exclude other sources of revenues).
From U DNN will earn $135 to 142.5 million.
From V DNN will earn $36 to $48 million.
This creates a range of $171 to 190.5 million.
If you add costs of $22.5 million a quarter (essentially the Q1 expenses), then expenses are $90 million for the year.
If we also assume 190 million shares outstanding, then the EPS forcast for the year would range from $0.43 to $0.53.
The company earned $0.25 last year, then we get an EPS growth of 72% to 112%.
Now if we use a PPS of $7.50, then the forward PE is 17.44 to 14.15 and PEG of 0.24 to 0.13.
Now I have used what I though were fairly conservative estimates of prices and given those estimates, I get a minimum of PE of 17.44 and a PEG of 0.24.
This stock is undervalued and todays price action is indicative of this.
What would you consider a fair stock valuation based on your calculations?
Only concern is that you used a fixed price of 22.5 million per quarter for costs. Probably would see a ramp as activity picks up.
I agree that costs may increase over the next couple of quarters, but keep in mind that this quarter the company took that $10 million tax loss hit from Zambia. That will not recur, but I am using that $10 million each quarter as a buffer against rising costs, but as you point out it may still be conservative. The company, however, actually sounded pretty positive about input costs decreasing over the next year. I am not sure if I am as positive as them.
In terms of fair value, I guess that is the million dollar question. Generally, a PEG of 1 is considered a good value. Commodity stocks, however, tend to trade a lower PE and PEG values. Right now, $7.50 represents a PEG of 0.24 to 0.13. I would think that DNN should trade at least at a PEG of 0.8. That would translate into a PPS of $24.77 at the low end and $47.50 at the high end.
As I look at the PPS now, I think we would be lucky to get $25 by the end of the year. I looked at smartmoney and ( http://www.smartmoney.com/eqsnaps/index.... and the lowest PE over the past 5-years was 30. Using that number we get $12.90 to $15.90.
So when all is said and done, I would expect to see DNN between $13 and $16 at the end of the year. IF, and that is a big if, the hot money comes back into this sector, then $25-$30 is not impossible, although I find that unlikely.
Investors Pummel Denison Mines Despite Glowing Q2 Profit
By Colin Perkel
10 Aug 2007 at 03:25 PM GMT-04:00
TORONTO (CP) -- The CEO of Denison Mines Corp. [AMEX:DNN; TSX:DML] lamented stock market conditions on Friday as investors pummelled the uranium producer despite second-quarter results that showed a swing firmly into the black due to significant asset sales and higher revenue.
The Toronto-based company, which reports in U.S. dollars, earned almost $41 million in profit for the three months ended June 30, versus a net loss of $3 million last year.
The bulk of the black ink recorded in the quarter came from net asset sales of almost $38 million - primarily the disposition of Denison's stake in Fortress Minerals Corp. for $29 million and other portfolio investments for $16.5 million.
For the quarter, Denison revenues were just shy of $19 million, compared with just $2,000 in 2006, but expenses jumped to $18 million from $4.5 million last year.
Investors appeared unimpressed with the results, as Denison share prices, which have shed about 40% of their value in the last three or four months, plunged 4% Friday in heavy selling.
Denison stock closed at C$9.38 the Toronto Stock Exchange, a loss of 41 cents or 4%.
''I desperately hope that we get through this terrible market situation as far as the stock market is concerned,'' CEO Peter Farmer said on a conference call from Saint John, N.B.
''It always surprises me when you have a company that's stronger than it's ever been and yet the stock price today ... is some 40 odd percent lower than we were earlier in the year (but) we are strong and we're moving forward to get stronger.''
Second-quarter profits amounted to 21 cents a share, as opposed to a loss of three cents per share in the same period of 2006.
Quarterly revenues totalled $15 million from the sale of 145,000 pounds of uranium-3O8.
Sales from Canadian production from the McClean Lake joint venture amounted to 70,000 pounds, at an average price of $80.51 per pound. U.S. production totalled 75,000 pounds at an average price of $130 per pound.
Spot prices for U308 reached $136 a pound at the end of June, up sharply from $95 three months earlier, but have since fallen back to about $110.
''We've always considered 2007 as the year for building Denison for a prosperous future in a dynamic uranium market primarily by setting the stage for rapidly increasing uranium production,'' Farmer said.
Denison expected to see production soar from about 705,000 pounds this year to more than 3.5 million pounds next year and higher than 5 million in 2011.
To prepare for the extra production, Denison has acquired the Kariba project in Zambia, is moving forward with projects in Mongolia, has reopened a mine in Colorado and is rehabilitating another in Utah for $15 million, he said.
The company is essentially debt-free and has about $60 million in cash, Farmer said.
Denison has mining assets in the Athabasca Basin region of Saskatchewan and the southwestern United States including Colorado, Utah, and Arizona, as well as ownership interests in two of the four uranium mills now operating in North America.
Also in the quarter, Denison bought shares leading to the takeover of Australia's OmegaCorp Ltd. and now owns 96% of its outstanding shares and plans to buy the remaining shares as soon as possible.
The pressure on the spot uranium price is off. Perhaps this will end the weekend price watch, which has taken on the cloth of a ‘hurricane watch.’ After 47 consecutive months without a drop in price, weekly spot U3O8 had a small hiccup. It was inevitable. In 85 percent of those 47 months, the uranium price surged higher.
According to the month-ending edition of Nuclear Market Review [NMR], the spot uranium price registered at US$135/pound at the end of June – down by US$3/pound from the previous week.
“After 23 months of tight supply, rising spot prices, and intense bidding for material, buying interest has waned considerably,” wrote NMR editor Treva Klingbiel. “And the market now sees increasing interest on the part of sellers to move material.” Klingbiel was referring to the period commencing August 2005, when the spot uranium price first crossed the US$30/pound threshold.
Lack of aggressive buyers helps explain why TradeTech dropped the consulting service’s U3O8 price indicator this past week.
A few told us they would be willing to sell at US$135/pound, but have not been able to find buyers at this price,” chief executive Gene Clark told StockInterview in a telephone interview. “No one really needs it to meet contract delivery requirements right now. All the buying interest seems to be from discretionary buyers.
According to the June 30th issue of NMR, active spot supply rose to 2.5 million pounds U3O8 while active demand dropped to less than 900 thousand pounds. The supply/demand ratio rose to 2.8 during June.
In response to many pundits who have been chattering about a peak in the uranium price, we asked Clark about this. “We don’t think it’s peaked,” he told us. “But speculators could make the market volatile.”
We asked him what it would take to ‘collapse’ the uranium price right now. “If speculators threw five million pounds or more into the spot market, this would put a lot of downward pressure on prices,” Clark responded.
But what about the long-term market? “The long-term market is fine,” Clark answered. “We still see considerable long-term activity, with no indication of softening prices there.” TradeTech’s long-term price indicator remained at US$95/pound.
It was at this point when we discussed the spread between the long-term price of US$95/pound and the much higher spot price. We asked if the spread was indicative of a ‘speculator’s premium.’ Clark told us, “There is definitely a speculator’s premium. In more normal market conditions, the basis for long-term base prices has typically been US$1-2 above the spot price.”
He explained:
Our long-term price indicator is really more appropriate for initial delivery beyond the 2010 time frame, where nearly all the long-term activity is occurring. Those who have to buy for delivery through 2009 would probably pay more than US$95/pound,” Clark noted. “Thus, the speculator premium isn’t necessarily as high as the US$40 spread between these price indicators.
For the rest of the summer, and especially during August, Clark predicts the market will remain slow, given the historical experience. “Maybe we’ll see more buying in the fall,” he told us.
How Does The Price Hiccup Impact Uranium Mining Stocks?
According to Matthew Smith of TheInvestar, “Uranium stocks hit support levels across the board this past week.” Smith believes his Canadian uranium mining stocks index could drop by another 10 percent or more, which he considers ‘quite healthy.’
Smith also invests in the stocks found in his index. He wrote in an email, “We have been nibbling over the past week and a half, but are keeping some of our buying power available should we head lower.”
Smith told us, “Some of the best opportunities out there on the buy side are companies with actual deposits in ‘safe’ countries around the world.” Although Smith is not a registered investment adviser, he favors companies with uranium deposits in the western United States, such as Strathmore Minerals and UR Energy..
But Smith also believes Forsys Metals (FOSYF.PK) could soon go in play and possibly become a takeover candidate, following in the footsteps of UraMin. On June 15th, state-owned AREVA offered to pay more than $2.5 billion in cash to buy UraMin’s assets. As found with Forsys Metals, UraMin’s most advanced uranium project is in Namibia. One of our sources informed us that AREVA is not yet done buying companies in Africa.
This past Thursday, Forsys announced in a news release an increase in the measured and indicated U3O8 resource at the company’s Valencia deposit in Namibia to 41.4 million pounds. The company also forecast an increase of its scheduled U3O8 production, during the ‘steady state’ period, to 2.9 million pounds.
Other companies informed us of UraMin shareholders now searching for the ‘next new idea’ into which they might invest. Institutions and large sophisticated shareholders have been phoning and meeting with several uranium companies for the purposes of taking significant stakes. A new home for their recent winnings is how one uranium mining company defined this renewed interest in his firm.
Positive developments suggest uranium mining companies are entering the mainstream. For example, Uranium Resources (NASDAQ: URRE) and Uranerz Energy (Amex: URZ) both joined the Russell family of U.S. Indexes during the recent re-balancing.
We reviewed Bart Jaworski’s Uranium Equities Update, published on June 28th. Bart is the uranium mining analyst at Raymond James Equities Research Canada. Despite the minor spot price correction, Bullish Bart does not believe uranium prices have peaked. Part of the weakness he attributes to the psychological barrier of US$100/pound long-term pricing. This is probably one of the better arguments, because long-term uranium contracts provide a more persuasive basis for the uranium bull market galloping forward.
Jaworski’s four uranium mining stock recommendations are:
Uranium One (SXRZF.PK), Strong Buy – Price Target: C$20 UR Energy (UREGF.PK), Strong Buy - Price Target: C$5.30 Denison Mines (AMEX: DNN); Out Perform – Price Target: C$16.50 Strathmore Minerals (STHJF.PK); Out Perform – Price Target: C$5.60
In mid April, industry insider and Yellowcake Mining (YCKM.OB) director Dr. Robert Rich warned of a uranium price adjustment. “The minute buyers see things go down, they are going to flock back into the market,” he told us.
For now, several stock analysts believe the current weakness could represent a buying opportunity. In discussions we had over the past month with various U.S.-based funds, we have few doubts the market should have a new wave of buying once the current correction runs its course.
Just as the spot uranium price has begun a consolidation, or flattening, phase, so have uranium mining stocks. As we said, it’s probably just a hiccup.
Julie Ickes co-wrote this article.
David Urban submits: The Uranium bull market has been going on now for 4 or 5 years and some people think that it may be long in the tooth. Nothing can be farther from the truth.
During the 1990's, uranium and mining in general was in a global bear market. Low spot prices made mining an unprofitable activity. If you were a large cap mining company you hedged production in order to lock in revenues and kept a close eye on expenses. Breaking even was the name of the game and Greenfield exploration was out of the question. But the awakening of China and India changed everything. Industrialization and manufacturing created needs for commodities across the board and with that prices have soared. Large-cap mining companies, hesitant to remove hedges and explore new Greenfield properties, have largely missed the boat. But who can blame them? After decades of fluctuating prices they had good reason to be cautious.
Filling the gap were new, startup mining companies. Taking a different view of the global economy they went about surveying land, acquiring property, and drilling holes. Property was bought from companies who surveyed and drilled areas decades ago with the hopes of using state of the art technology to better understand the potential mineral resources lying under the surface.
Using current technology, junior mining companies were able to look deeper underground and reassess drill cores to come up with a more accurate indication of a properties value. Computers and software allowed companies to create 3D scaled maps of a resource and better understand the appropriate type of mining.
Junior resource companies raised capital through stock issuance on foreign exchanges and investors rolled the dice hoping that the company would literally and figuratively, strike gold. Gains of 500-5000% are not out of the question. The hope was that if a company struck a major deposit they could either sell the company to a major or bring the mine into production. Junior companies have also merged and created many mid-tier mining companies with the hopes of becoming a new major or a more attractive acquisition candidate.
So where does that leave us with respect to Uranium? Well, many of the junior companies were listed on the Canadian stock exchange which shares a dual listing benefit with the US. Canadian companies are granted Pink Sheet or OTC listings in the US. When people think of the Pink Sheets and OTC companies images of penny stock scams come to mind. But some of the mining companies in Canada have market caps upwards of $500 million and a billion dollars with managements who have over 50 years combined experience in the mining industry.
Being on the Pink Sheets or OTC is off the radar screen from Wall Street so coverage by the major firms is non-existent, but that is changing. Canadian mining companies are shifting their listings to the American Stock Exchange. Two recent companies are Denison Mines (DNN) and Crosshair Exploration (CXX) with more expected to follow suit.
Uranium futures started trading yesterday on the NYMEX. Later this year, Wall Street is expected to start covering the Uranium sector when enough companies have listed to make it worth the time. Ahead of this coverage, if you are looking to invest in Uranium mining companies, you might favor companies who have applications filed with any of the major US exchanges. Watch your technical charts for buying and arbitrage opportunities ahead of the listing date as brokers accumulate stock to push to clients.
Disclosure: Author is long DNN and CXX
Rick Rule’s Picks
Rule said the most important aspect of any company is management. Investor’s are betting on the management’s ability to bring value to the property.
“Money is made where the rubber meets the road. And people make the money,” he said.
He said it is important to find out the actual value of the property, not by asking the company, but by asking what someone else would pay for it. Also, investors should understand how much it’s going to cost to develop the property and where the money is going to come from, he added.
For these reasons, Rule picked Denison Mines [TSX:DML], Azimut Exploration [TSXv:AZM] and Paladin Resources [TSX:PDN].
He said Denison has deep exposure in uranium worldwide with a strong track record. As an intermediate uranium producer with five active uranium mining projects in North America, Denison expects estimated production of 5 million pounds of uranium by 2010.
The company’s 25%-owned Midwest uranium deposit contains 41.7 million pounds of U308 of Proven & Probable reserves (345,000 tonnes grading 5.47% U3O8, 4.37% Ni and 0.34% Co), and is scheduled to begin production by 2010.
Denison’s other assets include an interest in two of the licensed and operating uranium mills in North America, with its 100% ownership of the White Mesa mill in Utah and its 22.5% ownership of the McClean Lake mill in Saskatchewan.
The company has exploration properties in the Athabasca Basin in Saskatchewan, Canada and in the Colorado Plateau, Henry Mountain and Arizona Strip regions of the Southwestern United States, as well as in Mongolia and, indirectly through its investments, in Australia.
Denison is also the manager of Uranium Participation Corporation [TSX:U], a publicly traded company which invests in uranium oxide in concentrates and uranium hexafluoride.
Denison Mines (DNN), who started to trade on the AMEX under the symbol DNN a month ago in addition to its existing DML listing on the Toronto Stock Exchange, has remained resilient during the May correction that has recently hit other uranium stocks.
Whereas its most-oft quoted rivals sxr Uranium One (SXRFF.PK) and Paladin Resources (PALAF.PK) have traded mostly sideways and down respectively, Denison’s share price has appreciated, despite reporting a net loss of $5 million in Q1 and slashing uranium production forecast at its shared McClean Lake mine by as much as 40%. With the comparative dearth of available American-listed uranium stocks as compared to Canadian ones, Denison has adroitly positioned itself despite some recent disappointments.
