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

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