Headquartered in Toronto, Canada, Denison Mines Corp. (DNN - Get Rating) is a uranium exploration and development company. It has a 90% ownership position in the flagship Wheeler River project, the largest undeveloped uranium project in the Athabasca Basin region. As a result of the temporary suspension of production at its Cigar Lake mine in response to the pandemic, the company suffered a substantial decline in its mining revenue in the first quarter of 2021. Closing yesterday’s trading session at $1.26, DNN’s stock is trading 30.4% below its $1.81 all-time high, which it hit on February 17.

The stock has gained 17.8% over the past month after DNN announced its offer to acquire JCU (Canada) Exploration Company. However, the company recorded significant losses in its last reported quarter. Furthermore, limited demand for uranium and investors’ concerns surrounding the nuclear-energy industry’s prospects could retard DNN’s growth going forward.

Here is what we think could influence DNN’s performance in the near term:

Industry Headwinds

Since the accident  at Japan’s Fukushima nuclear plant in 2011, the demand for uranium has declined significantly as nations shied away from nuclear power sources. According to UxC, a nuclear fuel market research firm, global uranium demand is expected to shrink slightly to 178 million pounds in 2021 from 2020’s 181 million pounds.

Although increased global interest  in clean energy adoption could be beneficial for the industry, uranium prices remain low. A substantial decline in uranium production and weak demand could weigh heavily on DNN’s performance in the near term.

Acquisition Deal Can Increase Expenses

On May 4, DNN offered to acquire 100% ownership of Overseas Uranium Resources Development Co., Ltd.’s wholly owned subsidiary JCU (Canada) Exploration Company, Limited. The transaction will include  a cash payment of up to CAD$40.5 million ($33.46 million). Given the company’s weak cash flow, this acquisition could put pressure on DNN’s financials.

Unimpressive Quarterly Performance

DNN’s total revenue was $2.49 million, representing a sequential decline of 39%, in the first quarter, ended March 31, 2021. The company’s net loss came in at $8.88 million, compared to a $1.04 million net loss in the first quarter of 2020. Also, DNN’s McClean Lake mill generated $137,000 in toll milling revenue for this quarter, compared to $963,000 in the prior-year period. The decrease can be attributed to the mill’s temporary shutdown  due to the pandemic. Moreover, its general and administrative expenses increased by 20% year-over-year to $2.63 million over this period.

DNN generated a $1.56 million fair value loss on share purchase warrants, as well as a $91,000 loss on investments carried at fair value. Also, it recognized a $2.04 million loss in other income/expense during this period, primarily attributable to a fair value loss adjustment and issuance costs related to the share purchase warrants.

Stretched Valuation

In terms of forward EV/Sales, DNN is currently trading at 67.08x, which is significantly higher than the 2.57x industry average. Also,  its 97.73x  forward Price/Sales multiple  is significantly higher than the 1.62x industry average. In terms of trailing-12-month Price/Book, DNN’s 4.54x is 149.4% higher than the 1.82x  industry average.

Consensus Price Target Indicates Potential Downside

Currently trading at $1.26, analysts expect the stock to hit $0.85 in the near term, indicating a 32.5% potential downside. The price target ranges from a low of $0.65 to a high of $1.22.

POWR Ratings Reflect Bleak Prospects

DNN has an overall F rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DNN has a D grade for Stability. This reflects that the stock is more prone to volatility compared to its peers.

The company has an F Value grade, reflective of its premium valuation. Also, it has a D grade for Growth, in sync with DNN’s gloomy growth prospects.

In addition to the grades we’ve highlighted, one can check out additional DNN ratings for Sentiment, Quality and Momentum here. DNN is ranked #49 of 51 stocks in the F-rated Miners – Diversified industry.

Click here to view the top-rated stocks in the Miners – Diversified industry.

Bottom Line

DNN’s temporary production suspension and mine closures have negatively impacted the company’s revenues and cash balance. Given the uranium industry’s currently bleak prospects , the stock could be a risky bet. Also, the fact that it has been bleeding money does not justify its current valuation. Thus, we think it is best avoided now.

DNN shares were trading at $1.23 per share on Thursday morning, down $0.04 (-2.78%). Year-to-date, DNN has gained 90.11%, versus a 11.94% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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