Denison Alleviates Liquidity Risk

By Joseph Nguyen | June 26, 2009 AAA

Recently, the Korea Electrical Power Company (KEPCO) concluded an agreement with Denison Mines Corp (TSE:DML.TO) that gives the Korean company a 17% equity stake in the Canadian miner. Denison will sell about 58 million shares to KEPCO in exchange for approximately C$75.4 million.
Just over a week earlier, Denison and KEPCO had signed an agreement that secured 20% of Denison's annual U308 production from 2011 to 2015. This offtake agreement requires Denison to deliver a minimum of 350,000 pounds of U308 annually, and granted KEPCO an option to purchase an additional 400,000 pounds a year from 2011 to 2015.

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Denison Mines
Being one of the riskier uranium miners, this deal with KEPCO should help shore up Denison's balance sheet and help alleviate some of their liquidity risks. The miner only had about $2.5 million in cash and $23 million in receivables at the end of the first quarter; however it had used over $30 million in cash for operations. This cash squeeze on their balance sheet is one of the main reasons management had indicated it was planning to suspend some operations in the U.S. The cash infusion from KEPCO should help Denison maintain its operations for now. (Learn about the components of the statement of financial position and how they relate to each other in our article, Reading The Balance Sheet.)

The Trend
Similar to Denison, power companies across the globe has been striking similar agreements. In early 2009, a Japanese consortium bought a nearly 20% stake in Uranium One (TSE:UUU.TO), another Canadian uranium miner. The offtake agreement allows the Japanese consortium to purchase up to 20% of Uranium One's production.

In addition, the Russian state nuclear firm Rosatom and the Japanese consortium have recently suggested they are looking to increase their stakes in Uranium One. Rosatom had secured a 17% stake in early June, and now both groups are looking to further secure their future uranium supply.

The Bottom Line
Direct investments and offtake agreements by major power groups in uranium suppliers are always a welcome sign for investors. They display the degree of confidence these groups have in the uranium miners to deliver in future years, and illustrates the competition for the tight supply of uranium expected in the next five-10 years. (For a related reading, take a look at our article Forget Green Stocks, "Green" Will Do.)

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