Lots of Green Downstream

Together with Kalshi

Small Cap Pick: Denison Mines Corp (DNN-US, $2.0B MCAP)

Our need for energy is in the midst of a drastic transformation.

For the last several decades, energy demand in the United States has been relatively flat. Despite a rising population, increases in efficiency have kept overall demand in a plateau pattern.

Now — the game is changing.

With the introduction of AI, Microsoft builds a new data center every 3 days, and capital continues to pour into the sector.

Last week there was announcement that set a particular group of energy stocks on fire.

Amazon Web Services (AWS) announced that they signed three new agreements to support the development of nuclear energy projects — including enabling the construction of several new Small Modular Reactors (SMRs).

For frequent readers, this will sound familiar. One of our previous picks was Talen Energy (TLN) which also signed a big deal with AWS. Congrats to those that bought when the issue came out, the stock has had a great run (+175% YTD).

While we have focused on the Independent Power Producers, let’s shift the focus downstream further. There’s another area that has seen stellar returns over the last several years: Uranium Stocks.

• Uranium’s Role in Nuclear👉 Fission

• Overview 👉 What Does Denison Mines Do?

• Product Suite 👉 Customer Engagement Platform

• How Do They Make Money? 👉 Subscription + Usage

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Before we get started, we’d like to call out a HISTORIC political update.

Kalshi just received approval on its “Congressional Control Contracts” – making it legal for anyone to bet on political outcomes … including the upcoming Presidential Election. 

If you’ve walked around Times Squares lately, you might already know about this…

In case you’re unfamiliar with Kalshi, it’s a site where you can place bets on things like inflation reports or jobs data — and also when Bitcoin will hit $100K or what music artist has the #1 album this year.

But now they’ve really upped their game. Will Trump beat Kamala? Will Kamala win Pennsylvania? I don’t know, but you can now legally bet on these outcomes in all 50 states! 

Uranium’s Role in Nuclear 👉 Fission

Uranium plays a vital role in nuclear energy as the primary fuel used in nuclear reactors to generate electricity through the process of nuclear fission. When Uranium-235 atoms are split by neutrons, they release a significant amount of heat — which is used to produce steam and drive turbines, generating electricity.

This process is highly efficient, as uranium has a much higher energy density than fossil fuels — meaning a small amount of uranium can produce a vast amount of energy. To fuel reactors, uranium is enriched to increase the proportion of Uranium-235, making it more suitable for sustained fission reactions.

Nuclear energy, powered by uranium, provides stable and reliable base load electricity with minimal greenhouse gas emissions — making it an attractive option for reducing carbon footprints. However, the use of uranium comes with challenges. Among them are the generation of radioactive waste, which remains hazardous for thousands of years, and the risks associated with nuclear accidents. Safety protocols and advancements in reactor technology, such as control rods and cooling systems, help manage these risks — but the long-term storage of nuclear waste remains a complex issue.

Looking ahead, advanced technologies like fast breeder reactors (which can convert Uranium-238 into usable fuel) and small modular reactors (SMRs) offer promising ways to enhance the efficiency and safety of nuclear energy. While uranium is a finite resource, developments in reactor design could extend its viability. Additionally, research into nuclear fusion could one day provide an alternative energy source with less waste and greater sustainability, although it is not yet commercially feasible.

So… Let’s now focus on a company that mines this uranium, Denison Mines.

Overview 👉 What Does Denison Mines Do?

Denison Mines is a Canadian company focused on the exploration, development, and eventual production of uranium — primarily in the Athabasca Basin in northern Saskatchewan, which hosts some of the highest-grade uranium deposits globally. Its flagship project, the Wheeler River Project, is the largest undeveloped uranium resource in the region. Denison Mines employs advanced techniques to explore and assess uranium deposits — positioning itself as a key player in the uranium market, which supports the nuclear energy industry.

The company is also pioneering the use of in-situ recovery (ISR) mining technology, a cost-effective and environmentally friendly method that extracts uranium without traditional mining. Denison aims to become a low-cost uranium producer, helping meet the growing global demand for nuclear energy as part of the transition to cleaner energy sources. It is also committed to minimizing its environmental impact through responsible mining practices.

Asset Overview 👉 Three Uranium Development Projects

Denison will typically approach certain assets with partnerships with “the majors” — Cameco and Orano. Partnering with major mining companies is important for Denison Mines because it provides access to essential capital, technical expertise, and operational experience, which are critical for the successful development of large-scale uranium projects.

These partnerships also allow Denison to leverage existing infrastructure, such as processing facilities, and benefit from the majors' established market networks, reducing costs and accelerating project timelines. By collaborating with industry leaders, Denison can mitigate risks and enhance the efficiency of bringing its high-grade uranium projects to production.

Denison Mines has three major uranium development projects, all located in the high-grade Athabasca Basin in Canada. The flagship project is the Wheeler River Project, which includes the Phoenix and Gryphon deposits. Phoenix is notable for being one of the world’s highest-grade uranium deposits. Denison plans to use in-situ recovery mining technology at Phoenix, which is a cost-efficient and environmentally friendly method. This project is in the advanced development stage and has the potential to become one of the lowest-cost uranium operations globally.

The Waterbury Lake Project is another key development for Denison Mines. It hosts the Tthe Heldeth Túé (THT) deposit, a high-grade uranium resource. Although it is still in the earlier stages of development, Waterbury Lake presents a promising growth opportunity due to its location near established mining infrastructure, which could lead to cost-efficient production in the future. The project is currently undergoing further exploration and feasibility assessments to better understand its full potential.

The third major project is the Midwest Project, which contains two significant uranium deposits, Midwest Main and Midwest A. These deposits are known for their high-grade uranium and are located near the McClean Lake mill, a uranium processing facility partially owned by Denison. The Midwest Project is in the pre-development phase but holds substantial potential for future production, thanks to its high-grade deposits and proximity to existing processing infrastructure. Together, these three projects position Denison Mines for long-term success as a low-cost, high-grade uranium producer.

How Do They Make Money? 👉 Business Model Breakdown

The three key things to consider are:

1. Uranium Production Costs

• Exploration and Development Costs: Denison incurs costs for exploring new uranium deposits, conducting feasibility studies, obtaining permits, and developing the necessary infrastructure to mine the uranium. These costs vary depending on the scale of the project and the method of extraction used (e.g. ISR, which is typically lower-cost than traditional mining).

• Mining Costs: Once a uranium deposit is developed, Denison incurs operational costs for extracting the uranium. With ISR technology, these costs are generally lower compared to traditional mining, as there is no need for large open-pit or underground operations. Costs include labor, energy, water, and chemicals used in the recovery process.

• Processing and Milling Costs: After extraction, uranium needs to be processed into a usable form (U3O8, commonly known as yellowcake). Denison's proximity to established mills like the McClean Lake facility helps reduce processing and transportation costs.

2. Revenue Generation

• Uranium Sales: Denison earns revenue by selling U3O8 (yellowcake), which is the refined product used in nuclear power plants. The price of uranium on the global market fluctuates based on supply and demand, geopolitical factors, and the level of activity in the nuclear energy sector. Denison sells uranium either through long-term contracts or spot market sales, depending on market conditions.

• Toll Milling Services: Denison generates additional revenue by providing toll milling services through its ownership stake in the McClean Lake mill. This means that Denison processes uranium for other companies in exchange for a fee, further diversifying its income streams.

• Royalties and Investments: Denison also earns money from royalties on uranium production from assets in which it holds a minority stake, as well as through strategic investments in other uranium companies.

3. Profit Margins

• Cost per Pound of Uranium (C1 Cost): A critical metric in the uranium mining industry is the cost per pound of uranium produced, often referred to as C1 cost. This includes direct costs of mining, processing, and transporting uranium. Denison’s use of ISR technology at projects like Wheeler River is expected to lower these costs, improving profit margins.

• Market Price of Uranium: Denison’s profitability depends on the difference between the market price of uranium and its C1 cost. When uranium prices rise, Denison’s margins increase, as its production costs remain relatively fixed.

By The Numbers 👉 Key Metrics

Keeping this dynamic of cost vs. commodity price in mind, first let’s check out where some of the key assets in development for Denison rank in cost on a global scale:

Next, let’s look at the 5-year chart for the commodity:

The rise in uranium prices over the past five years has been driven by supply constraints, including production cuts from major producers like Cameco and disruptions caused by the COVID-19 pandemic. Growing demand for nuclear energy, particularly in countries like China and India, and the global push for low-carbon energy solutions have further supported price increases. Additionally, speculative investment from funds like the Sprott Physical Uranium Trust and geopolitical uncertainties have added upward pressure on prices.

When it comes to “the most important thing” for Denison — it is their Wheeler River asset.

Stripping out the production profile forecasts:

With so much value sitting in the Wheeler project, look for updates on moving this asset into production as the key catalyst going forward.

Risks 👉 Potential Pitfalls

Reliance on the Wheeler River Project: Denison’s future growth heavily depends on the successful development of its flagship Wheeler River Project, particularly the implementation of in-situ recovery (ISR) technology at the Phoenix deposit. Any delays or failures in advancing this project, such as technical difficulties or unexpected regulatory hurdles, could significantly impact the company’s valuation and long-term revenue potential.

Limited Diversification of Revenue Streams: Denison currently generates limited revenue from its uranium production, relying instead on strategic investments and its stake in the McClean Lake mill for toll milling income. Until the Wheeler River Project is fully operational, Denison has relatively few diversified income sources, which makes the company more vulnerable to uranium market downturns or disruptions in its key projects.

Environmental and Social Opposition in the Athabasca Basin: Operating in the Athabasca Basin, Denison faces the risk of environmental opposition or challenges from indigenous communities and environmental groups. Any delays in gaining community support, or potential legal challenges, could result in project delays or increased costs, impacting the company's ability to execute its development plans on schedule.

Wrapping Up…

The thesis here revolves around the revival that we are seeing in Nuclear. As we face an incremental step-function increase in demand to support power-hungry AI data centers, we need to find more always-on power sources.

The trend was already moving towards this source of energy. Now it is turbocharged.

By looking further downstream, towards those that produce the commodity, you are making a bet on the overall space. However, this also introduces operational risk, where costs can get out of hand.

Focus on solid operators with established partners in the space. Denison is exactly that.

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Cheers,

The GRIT Alpha Team

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